The Secondary Market For Startups Is Rapidly Cooling

The secondary market which allow people to buy and sell unlisted shares is an important component of the startup world. By definition, shares and stocks of a startup are usually not listed in a trading exchange and therefore are quite illiquid. People find themselves owning shares of promising companies which they can’t resell easily. The time it takes to get out of an investment can be over a decade.

The same happens for founders and employees who work for many years without having the ability to monetize their participations. As their personal situation changes, they look for solutions to get some cash.

This is when the secondary or OTC market for stocks comes into play. It allows entrepreneurs and investors alike to try to buy / sell part of their positions without having to wait for a liquidity event (e.g. acquisition, IPO). The number of firms which offer the service of connecting and facilitating such transactions has increased manyfold.

As the technological industry experienced a second gold rush in the last couple of years, the number of these types of transactions have also rapidly increased. The value of these transactions as well.

This seems to be changing today. Several insiders in the valley are reporting how more difficult it is for employees today to sell their shares at identical valuations that their company raised money in the past. The price per share is going down and investors are taking a wait and see approach.

It is one of the first indication that we might have reached a ceiling in terms of pricing and valuation. It also points to the possibility that several startups are going to experience an important diminution of their current value and that some investors will have to revise the value of their holdings. Many prominent VCs have been warning about the existence of another bubble for the last couple of months and it seems that we might have reach that inflection point in 2016.