As the venture market continues to navigate the aftermath of the 2022 market correction, investors are paying close attention to the secondary market for insights into valuations and investor sentiments. Despite the challenges, the secondary market has shown some promising trends, and we reached out to five venture secondary investors to get their perspectives.
Key Takeaway
Investors in the secondary venture market are finding attractive opportunities in sectors such as fintech, cybersecurity, and marketing tech. Despite the overall tech slowdown, many companies within these sectors have maintained attractive growth and financial trajectories.
Opportunities in Venture Secondaries
John Zic, the founding partner at EQUIAM, highlights that sectors like fintech, cybersecurity, and marketing tech offer attractive investment opportunities. These sectors have experienced valuation downturns amidst the broader tech slowdown, but certain firms within them have consistently delivered on their financial targets.
When comparing the current opportunities to the heights of 2021, Zic notes that almost every subsector of the tech market was overvalued at that time. However, deal flow in blockchain/cryptocurrency firms was significant, driven by the crypto bull market. This deal flow has since slowed down considerably over the past two years.
Investors Bolstering Equity Positions
Many investors are also using this time to strengthen their equity positions in existing portfolio companies. Michael Szalontay, the co-founder of Flashpoint Venture Capital, explains that they are actively making follow-on investments in performing companies within their portfolio. The secondary market’s discounted prices offer attractive opportunities for equity acquisition.
Factors influencing investment decisions include growth, profitability, and the length of runway for each portfolio company. Investors like Szalontay believe that the current market presents an opportune time for buying, especially with discounted prices in the secondary market.
Valuations and Investor Sentiment
All the interviewed investors agree that company stake prices in the secondary market have significantly decreased, although valuations may not have reached the lowest point yet. The timing of a market bottom is a topic of debate among investors. While Szalontay sees positive signals from the Federal Reserve’s stance on interest rates as an indication of nearing the bottom, others have differing views.
Looking ahead, there are sectors that some investors believe are overhyped in the secondaries market. Additionally, there is divergence regarding the pace at which primary venture capitalists should re-enter the space if the market opens up next year. Lastly, the actual hunger for liquidity among limited partners (LPs) may not be as high as anticipated.
Conclusion
The secondary venture market is evolving in response to market conditions, offering investors attractive opportunities in sectors such as fintech, cybersecurity, and marketing tech. Despite the challenges faced since the 2022 market correction, many firms within these sectors have exhibited strong growth and financial performance. As the market looks towards the future, it remains to be seen how valuations will continue to shift and investor sentiment will shape the venture secondary landscape.
