Seasoned secondary players were expecting it. As the markets began to plummet in recent weeks, shareholders who’d turned down earlier offers to buy this or that holding were suddenly curious to see if those interested parties might still be interested. Alas, it was too late. The market was moving too fast. It still is.
“Up until last week, everyone was calling to get old pricing,” says Hans Swildens, the founder of 20-year-old Industry Ventures in San Francisco, an investment firm that invests in hundreds of venture funds and is also among the industry’s biggest buyers of secondary shares. “It was, ‘Hey, we reconsidered this offer. Could you pay me what the market was paying last month?’ ”
Swildens says that everybody in the secondaries market said no. They had no choice. “It’s almost impossible to buy when you don’t know what numbers you’re buying against. Buyers don’t know how far the [net asset value] of funds will go down. No one wants to buy something for $10 million that might be worth $5 million [in the not-too-distant future].”
Such is the state of affairs in the venture-backed world of startups right now. Though 2020 once promised to be a year of splashy IPOs and long-awaited liquidity for players across the ecosystem — from employees to founders to venture firms to the limited partners that invest in venture firms — it may well be remembered instead as the year that time stood still.
Certainly, everyone seems stuck in place right now.
While limited partners are largely avoiding their phones, and hoping the venture managers in their portfolio will stop asking for capital, venture firms that didn’t push their portfolio companies to go public are now feeling pressured to produce liquidity somewhere in their holdings, and that’s tougher than ever right now. With some exceptions, cash-rich companies are in no hurry to go shopping (they also have to worry about looking monopolistic). With some exceptions, companies aren’t merging just yet (though expect a lot of this soon).
Yet secondary shops have hit the pause button, too, as everyone on the ground tries to get a better sense of where the bottom might be.
It could take one to three quarters to assess, say those in the know. For one thing, a lot of nontraditional players have propped up the venture market over the last decade, and some, including hard-hit corporations and family offices, might not have the wherewithal to support their venture managers, even if that’s not obvious today.
On the company level, there are also plenty of questions that are unanswerable at the moment. “Right now, everything is on pause in terms of activity,” says Swildens, adding that, “in a month, we’ll know more. Are people going back to work or not? What were Q1 numbers like? How does April look? Did this company miss revenue by 10% or 80%? Did it beat revenue in March or April? For the buy side, in a month, we’ll have data from the companies and the funds, while right now, no one knows how bad it is.”
In the meantime, secondary players are in the catbird’s seat, seemingly, even while they have to sit tight for what insiders say could be one to three quarters.
Chris Douvos, a longtime investor in venture funds, observes that there’s an “immense amount of capital looking for fund stakes,” meaning from outfits like Industry Ventures and roughly 75 other players in the market. “If I’m a VC right now, I’m wondering when [these] investors — folks who have billions of dollars in committed capital and love to buy fund stakes at 65 cents on the dollar — start capitulating, but that’s like six to nine months out when you really see [these transactions] happen.”
Swildens suggests that’s about right. “Sellers have to reset pricing expectations, then buyers have to come up with a price they are willing to pay, and those things have to meet. And that takes one to two quarters.”
What’s happening between now and then are calls, more calls, and endless number-crunching. Some of it is proving dismal, with a lot of those numbers shrinking as revenue slows and sales cycles grow harder. Some of it, around pre-IPO companies, is likely particularly agonizing. “All the boards and CEOs are trying to work out pro forma plans now,” says Swildens. “If they cut spending too much, growth slows too much and they can’t take the company public next year. They can’t cut to the bone, or they can’t list it.”
There are bright spots, however. As Swildens observes, “Everybody is being negatively impacted right now, with the exception of some bandwidth, infrastructure, fintech and edtech investments. For some of these, [this shutdown] has been kind of a good thing. Edtech companies’ prices are probably going to go up with tens of millions of people suddenly signing up for their services.”
Now to hurry up and wait.