In my podcast, I explore the many different facets of the world of high tech from development to marketing, to sales, to entrepreneurship, all with the goal of collecting key insights on startups for listeners to gain value from this knowledge-sharing. So, what did I discover this week?
Secondary investments have been growing in popularity in the last several years as tech companies see a new opportunity to both give liquidity to shareholders and receive value back as an enterprise. A secondary investment, for those unfamiliar with the term, is an offering where investors purchase shares (stocks) from sources other than the issuer itself (employees, former employees, or investors). Moran Chamsi, Managing Director of Amplefields Investments recognized that secondary investments for late-stage tech companies can be key to helping with growth and providing employees greater financial motivation. With portfolio companies spanning cyber security to ad tech and everything in between, he is confident that secondary investments will become a pillar of startup financial roadmaps in the years to come.
Why Use Secondary Investments
In the tech world, companies are constantly looking for new tools and processes that can help them grow. One of those tools is direct investment from stakeholders such as venture capital funds, angel investors, and enterprise investment branches. They are looking to make it big, obviously, off of their investments but that can take time. “Startups are building themselves as big enterprises and to scale, so now the exit point is later, so stakeholders want to see some success on the road, and that is where secondaries come in,” Moran explains.
Most startup investments work like this: you have shares or stocks to purchase. Investors purchase preferred shares, and their capital goes directly into the company to fund their activities. However, these shares are private, as these companies are not public companies, meaning the investor holds their shares themselves. Now, in the ‘regular’ market, these shares are not very meaningful until a major financial event, such as an acquisition or initial public offering (IPO), occurs and the investor gets his profit share.
In the secondary market, however, investors get an opportunity to make their investment monetarily worthwhile for them. “You pay to the shareholder money by selling some of your own shares,” Moran adds, “and when you do, you help the founders, employees take money home, and it helps their morale and, of course, you help the company work better and reach their goals.” Essentially, secondaries offer holders liquidity, or the ability to receive real cash, at an earlier stage than might otherwise come from an acquisition or a major startup exit. This can be immensely helpful as startups grow and sometimes need these kinds of ‘carrots’ to help all stakeholders feel better about their position in the startup.
Popularity Grows as Exit Points Are Delayed
"The market has created a need of giving some sort of compensation to founders and employees along the way," Moran goes on to reiterate, "so that’s why we see a rise in popularity in secondaries." The secondary market has always been around, but, as Moran sees it, relying on the secondary market comes simply from a need for stakeholders to see cash earlier. It is a reality of the shift in mentality from startup exits to startup scalability.
With greater adoption of secondary investments, Moran hopes that his team at Amplefields Investments can go about creating a system of standards that makes secondary investments more regulated for late-stage tech companies, especially in Israel. By creating attractive investment packages, he sees a way for companies to look at secondaries as a true financial tool for growth and not just as some large, amorphous investment giant. At the end of the day, in connecting secondary markets in a stronger way to successful tech companies, the path can be paved for even more uses of secondary markets down the line.
If interested in secondary markets for your startup, it is important to first review all necessary pathways with a financial advisor or consultant. For early-stage startups, this is generally not a relevant step but as your startup continues to grow, keep secondaries in mind!