The resurgence - and evolution - of the venture secondaries market

After a COVID and economic policy-induced coma, the secondary market for venture has bounced back. Interestingly, this cycle of venture secondaries (or pre-IPO secondaries), has seen the rise of a new feature–the special purpose vehicle (SPV).

How did we get here? 

Monetary and fiscal policies in response to COVID supercharged an asset bubble in venture, leading to frothy valuations and heightened secondary trading activity. As interest rates rose and the pre-IPO venture bubble burst, secondary trading activity dipped substantially over the course of 2022 and into 2024. Many growth and pre-IPO startups were left with frothy valuations from 2020-2022, while public growth companies (which have liquidity and ongoing price discovery) saw their valuations correct downwards. With lots of capital in the bank, these companies didn’t have a reason to go back out to the market to fundraise in a grim capital markets environment, and as a result, many of them maintained these inflated headline valuations.

The secondary markets became dislocated with this fundamental breakdown in price discovery. Sellers were unwilling to lower their expectations sufficiently to establish a market-clearing price and buyers were left with uncertainty in the cratering secondary markets, wary of catching a falling knife. With this fear, they erred toward staying on the sidelines or submitting low bids. This imbalance caused the bid-ask spread, or the gap between buyer and seller expectations, to widen substantially.

The market bounced back in 2024, with private markets outperforming their public counterparts, according to Caplight. On the Sydecar platform, 227 secondary transactions closed in 2024 – an increase of nearly 200% over the prior year.

3 reasons for the secondary market surge

In addition to the cyclical nature of markets, there are three primary reasons for the recent surge in secondary trading. 

1. AI enthusiasm

The meteoric rise of AI in the last three years has been a meaningful catalyst in reviving the venture secondary market. Investors are eager to back high growth AI companies, which are often inaccessible without an employee or investor selling their shares on the secondary market. For example, xAI raised $12 billion in 2024 at a valuation that was approximately a 11,500% increase from the year prior. Additionally, Anthropic raised $8 billion and doubled its valuation. 

2. Lack of IPOs

The window for IPOs is more or less closed right now, which puts a lot of pressure on private markets' liquidity. Secondaries act as a pressure valve when public markets aren’t available for exits. That said, an opening of the IPO window wouldn’t necessarily cool off the secondary market. It could even help to generate investor interest in companies on their way to becoming publicly traded. 

Venture-backed firms are staying private for much longer these days, causing value creation to happen in the private markets, making secondaries an appealing access point for investors looking to stake a claim in a company’s growth. 

3. A settling market

The secondary market for venture is priced as a function of public tech stocks, as well as primary venture financings. As the public markets stabilized in the wake of the pandemic, pre-IPO secondary markets have been able to find some footing. Further, as interest rates have stabilized, investors have felt more comfortable revisiting the pre-IPO markets. While there has been a wave of volatility in the markets resulting from macro uncertainty, the overall arc of stability in rates and markets over the last year has helped create investor confidence in returning to pre-IPO secondaries.

The rise of SPVs in secondary trades

This latest wave of secondaries has resulted in a rise in prominence of the SPV. SPVs are distinct legal entities that are used in venture and across the private markets to purchase individual assets or otherwise perform specific purposes, such as taxation shielding. SPVs are distinguished by their limited liability, narrow operational scope, separate financials, and “pass-through” tax treatment. In venture capital, SPVs are used to pool capital from small checkwriters to invest in a single opportunity. They are often used by aspiring VCs looking to build a track record or established managers interested in extending co-investment opportunities to their investor network.

Previously, the pre-IPO secondary market was dominated by “direct trades”–transactions where one seller transferred their shares directly to one buyer. This means that if a seller held a large block of shares, they would either have to find a buyer with a large enough checkbook or find several buyers and enter into many transactions to fill their deal.

In this market cycle, secondary deal organizers and brokers have turned to SPVs to solve this problem. By the end of 2024, SPVs made up 43% of the total secondary market trading volume, a big jump from 12% in Q1 2023, according to Caplight.

SPVs serve a critical need for venture secondaries, allowing a seller to transact with multiple buyers in a single transaction. Simply put, a single structure to wrap a one-to-many transaction is an efficient way to match supply and demand in less liquid private markets. 

While it is uncertain how long the current secondary market upmarket will last, SPVs solve a real problem in this space and help create liquidity, and they will continue to be an integral part of how pre-IPO secondary deals get done.

Shriram Bhashyam is the COO of Sydecar, an SPV and fund administration platform for venture capital. He was previously co-founder and Chief Strategy Officer of EquityZen, a leading marketplace for buying and selling shares of private companies, and Co-Head of Business Development at Forge Global, a platform for institutional trading of private shares.