The revolution of the secondary
From Exit Platform for Employees – to Sustainability Engine for the High-Tech Ecosystem
The slowdown in financing rounds and IPOs, together with corrections to 2021 valuations has created lucrative opportunities on the secondary market, in addition to an indirect funding channel for early-stage investors.
Over the past year and a half, the Israeli high-tech industry has experienced a dramatic decrease in fundraising volumes, the IPO market has almost disappeared, and exits are rare. Simultaneously, the rise in interest rates in the market did not encourage new investments. This situation has significantly impacted early-stage funds that require a long time to generate returns. Furthermore, the funds that faced this situation struggled to raise new capital from investors since the previously invested funds were still “stuck” in the old funds.
After a challenging period, the hi-tech market is finally emerging from the crisis. Although it is still too early to definitively declare the end of the crisis, there are encouraging signs. With most companies’ valuations returning to a realistic level justifying new investments, the decrease in investors’ capital is accompanied by many attractive investment opportunities. Despite the decline in valuations since the previous fundraising, many funds are now liquidating their holdings through secondary transactions, with the support of companies’ management, sharing information and removing obstacles for secondary transactions.
This situation has also led to a change in the dynamics of deals: in the past year, there has been a noticeable increase in the involvement of early-stage investors in deals. Even after the occasional discount, which can be as much as half the company’s value in 2021, they manage to generate significant returns, thanks to their early-stage investments. The money released from old investments is now available for new investments, and the market encounters attractive investment opportunities after the crisis and during its intensification.
The increase in secondary investments revitalizes the market and circulates capital in the Israeli venture industry. The long pause in fundraising rounds over the last year and a half created an onerous gap in startups’ capital runway, and the war has made the need to stretch funds even more acute. Therefore, the stream of capital to early-stage funds and angels has become a real “lifesaver” for startups in the early stages that did not have enough time to establish themselves or raise funds when liquidity was abundant.
All these factors have led to a change in the way the secondary industry operates and its contribution to the stability of the high-tech ecosystem. While in the past, most transactions were conducted with founders and employees, providing exits for high-tech employees, now most activity focuses on early-stage investors and angels, thereby directing new and vital funds to entrepreneurs in the early stages.
Leadership at the national level, in both government and financial institutions, plays a crucial role in signaling investment strategy, especially in this challenging period, and should not ignore the potential of the secondary market. Considering the mentioned advantages, both in acquiring shares of profitable and leading companies at attractive values and in redirecting these profits back to investment in young startups, the country can and should act in several ways.
For example, establishing government funds for investment in the secondary market or encouraging institutional bodies to invest in secondary funds can channel significant capital back into the industry. Because these bodies, such as pension funds and trust funds, are stewards of vast resources, investing in secondary transactions has an outsized impact on the high-tech industry.
In addition, tax benefits introduced by the Israeli Tax Authority to buyers and sellers on the secondary market would incentivize these capital flows and encourage activity in the market.
In summary, investing in the secondary market contributes to both investors and the entire Israeli economy. By encouraging investment in this segment, Israel’s current leadership can bring about significant growth in the market and ensure the continued success of the Israeli high-tech industry.
