Thinking of exiting a tech business? Fay Margo explains the growing ‘Secondary Direct’ market!


Patience is a virtue, or so the saying goes… It’s not always a virtue though, if you’re a venture capitalist. VC investors are having to wait longer and longer before exiting their portfolio companies, according to research carried out by Dow Jones Venture Source.

A growing number of venture-backed tech firms are finding they need to develop their business models further before an attractive exit is possible; which all takes time.

In the past, business angel and venture capital funds would buy and hold investments until the final exit, be it a trade sale, an IPO or liquidation.

However, an IPO exit is a tough nut to crack in today’s market. Only companies with substantially higher revenues and sustained profitability can still list on a stock market. Strategic buyers also demand more maturity. Many of the larger technology companies – Cisco, Sage, Oracle, Qualcomm and HP to name a few – have grown into much bigger businesses themselves, which is the reason they now want to do bigger deals.

The lack of quick and easy exit options for VC owners in today’s market has paved the way for the “secondary direct” investor. The secondary direct market, a relatively new, niche sector that came to Europe from the other side of the Pond in 2003, is thriving in today’s market. The fund model involves buying up single stakeholdings or whole portfolios of investments from shareholders who are keen to sell. It was initially seen as quick-fix solution to institutions affected by the bust a decade ago.

When a syndicate of venture capitalists owns stakes in a company, there is usually growing misalignment as to when each investor would prefer to exit. Secondary direct funds come in handy when some shareholders need liquidity, yet others want to continue growing the business. Secondary direct deals allow a speedy exit for investors closer to the end of their fund life or looking to change investment focus.

For example, Cipio Partners, one of the first entrants in the European secondary direct space, bought into 3i’s venture portfolio, when Britain’s oldest private equity institution decided to change its focus in 2009. One of these investments, ecommerce firm buyVIP, was sold onto Amazon (NASDAQ: AMZN) just a year later.

Corporate venture portfolios are also a target for Cipio, which bought companies like DisplayLink and PicoChip from an Asian semiconductor firm in 2010. PicoChip was exited via trade sale to Mindspeed (NASDAQ: MSPD) a couple of years later.

Finally, there is the potential to acquire shares from founders or single stakeholders in companies. In 2013, Cipio purchased shares in MyOptique Group (owner of Glasses Direct, MyOptique, Sunglasses Shop and LensOn) from its founder and former chairman, in Cint (a B2B platform for market research panels) from an early investor and in Bravofly (an online travel agent) from its founder.

Experience has shown that secondary transactions can have a very positive impact on the companies concerned. Providing a liquidity option for shareholders has enabled some of Europe’s leading technology companies to go for the long-haul and refresh their shareholder syndicates with new, deep-pocketed investors.

Thank you to Fay Margo of Cipio Partners.

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