The private market struggled for direction for most of 2023 on the heels of a significant correction in the second half of 2022. A dearth of liquidity pulled buyers and sellers in opposite directions, resulting in wide bid/ask spreads of around 28% for most of the year. VCs and hedge funds hesitated to allocate their dry powder in the absence of exits, and sellers became more motivated by the bleak prospects for traditional liquidity events.
As a result of this illiquidity, trades were fewer and farther between, and typically could only happen when buyers were willing to step up to a seller’s ask. The average transaction price of 60% of last round value in 2023, which is much closer to the average seller’s ask than the average bid, demonstrates this phenomenon.
AI stood out as a bright spot, with high demand for names like Cerebras, Databricks, OpenAI, Cohere, Anthropic, and others. Euphoria briefly gripped the market as Klaviyo and Turo traded heavily in anticipation of IPOs, but excitement waned after mixed performances in public listings.
Though the average transaction price ranged from a 30% to 50% discount (vs. last primary funding) for most of 2023, Figure 1 illustrates a significant disparity between the most highly sought after securities and the rest. Top quartile stocks often garnered material premiums to the last primary valuation. 2023’s AI frenzy accounts in part for this trend, with names like OpenAI, Anthropic, Databricks, and others fetching higher and higher prices over the course of the year, as demand outstripped supply.
Meanwhile, many B2B SaaS companies (which make up the largest share of issuers trading on Hiive) struggled with slow growth or cost cuts from their customers (who themselves consist disproportionately of tech companies and startups). This led to a chasm in pricing between the top quartile and the other 75% of issuers, with the latter averaging greater than 50% discounts over the course of the year.
Demand stabilized somewhat in the second half of 2023 as interest rate optimism took hold and the IPO window appeared to crack open. Time will tell if this represents the dawn of a new bull market, or a false start for investors.
In stark contrast to their behavior during the market’s euphoric apex in 2021, when VC buyers seemed to bid almost indiscriminately across the spectrum of unicorns, secondary market investors flew to quality in 2023 and became very selective.
Figure 2 illustrates that the most active securities on the Hiive platform benefitted from narrow bid/ask spreads and dramatically greater liquidity than the rest. Meanwhile the bottom quartile was essentially untradeable, with bid/ask chasms of 61% separating buyers and sellers on average.
While the flight to quality likely explains most of this disparity, there are other factors that cause differences in liquidity between securities. The most important of these factors is the restrictiveness of the issuer’s policies around secondary trading. When companies don’t allow transfer, investors stop following them, and this damages liquidity (and pricing). Other factors impacting spreads include the number of shareholders (more shareholders means more liquid) and the broad availability of information about company performance (another positive factor).
Figure 3 illustrates the significant growth in securities coverage on the Hiive platform during 2023. It also provides yet more evidence that investor interest is concentrated in about 25% of active companies.
Alongside a flight to quality, and similar to the bid/ask spread data in Figure 2, issuer restrictions partly explain this trend. Buyers, knowing that they were likely to be blocked, begin avoiding these securities altogether, leaving willing sellers stranded.
Direct transfers, which require the issuer’s express approval, account for the overwhelming majority of transactions that closed on Hiive in 2023. Indirect deals, where buyers acquire an economic interest in the company by purchasing a stake in a vehicle holding shares or entering into a contract to receive the economic value of the shares in the future, account for only 11% of closed transactions as shown in Figure 4.
Generally, only the most sophisticated investors execute indirect transactions due to some of the added risks associated with these structures.
The vast majority of sellers on behalf of whom we submitted direct share transfers requests in 2023 either had their sale to the original buyer approved by the company, or had their shares purchased at the proposed price by the company or another investor exercising a right of first refusal (ROFR). Therefore, companies allowed sellers to complete their direct transfers approximately 70% of the time and stopped the sale entirely in 30% of cases as seen in Figure 5.
The most common reasons that issuers gave for blocking transfers included: blanket prohibitions on transfer; the seller was not in an approved category of sellers; the company did not like the buyer; the company deemed the agreed price to be too low.
We should note that our figures do include some degree of positive selection bias. This is because buyers tend to focus on securities where companies are known or expected to allow transfers. Therefore the overall percentage of private issuers who allow direct transfers is likely lower than 70%.
Cloud startup Databricks topped the charts with a whopping 737 postings after announcing some significant commercial milestones. The data architecture and AI company was one of the few on the list that raised a primary funding round in 2023, defying the sea of down rounds in the private market to raise at a $43 billion valuation (~13% above its value in 2021).
Notably, the top three companies in the list are data companies. With data being foundational to the continued development of AI, companies such as Databricks (#1), Rubrik (#2), and Thoughtspot (#3) stand to ride the rising tide of the sector's secular growth trend.
The overwhelming majority of the companies on the list last raised funding in 2021, with many closing in on the three year mark since their last capital injection. With only a small handful being close to profitable, many will be forced to raise another round soon, either from the private or public markets, or explore the M&A route. In the lead up to this, the secondary markets provide a useful datapoint for investors and employees alike as to where valuations could land.
Despite the weak market backdrop, the Hiive platform surged, as orders, listings, crossed trades, and completed transactions all increased three to six times. We are grateful for this ringing endorsement by the market of our platform and product and we feel well-positioned to capitalize on the many opportunities that 2024 will bring. Private companies and their shareholders alike are demanding liquidity, and secondary marketplaces have a crucial role to play in unlocking the full potential of the private market.
Growth in accepted bids
Growth in active securities
Growth in institutional users
Growth in daily active users
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