High-growth startups across Europe have not typically had easy access to liquidity, and with the typical time between Series A and IPO getting longer and longer there are a whole host of stakeholders, from founders to early employees, that might be looking to cash in some of their shares early. Now, with the introduction two
High-growth startups across Europe have not typically had easy access to liquidity, and with the typical time between Series A and IPO getting longer and longer there are a whole host of stakeholders, from founders to early employees, that might be looking to cash in some of their shares early.
Now, with the introduction two new liquidity funds by European venture capital firms, the staple Silicon Valley practice at firms like Oceanic Partners and Saints Capital has found its way over the pond. So what are liquidity funds and who are the brave VC firms set to launch them in Europe for the first time?
Liquidity, or secondary funds, focus on buying equity stakes from early shareholders – be they angel investors, seed funds, current and former founders or employees – in high-growth, quickly maturing companies. It is a common practice in private equity but has only started to become prevalent in the VC world over the past few years, as a raft of technology unicorns have emerged in Europe.
In his blog post on the topic, investment banking analyst at Lazard, Chirag Modi, writes: “In 2018, capital invested in global VC secondary markets reached $10.8 billion, primarily driven by SoftBank’s $8 billion secondary transaction with Uber’s shareholders. Ignoring the activity in 2018, which is skewed by the SoftBank transaction, activity in the secondary market is very small relative to the traditional exit activity in the IPO / M&A market.”
That being said, Modi predicts that secondary VC funds will only become more popular as technology companies wait longer to execute on liquidity events like IPOs and acquisitions.
Laura Connell is a principal at Balderton Capital, where she works on its new Liquidity I fund alongside Daniel Waterhouse.
“What we were seeing not only in our portfolio companies but across the European ecosystem was an absence of a structured route to liquidity for any early shareholder, be they early employees or investors,” she told Techworld earlier this year. “What that meant was, at a time where the average time to IPO has almost doubled, you have a lot of people locked into a business who were in their early twenties when they started the business and now have real financial pain points like a first house or school fees.”
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Balderton’s $145 million fund was the first of its kind in Europe, but it already seems to have set off a domino effect, as Hambro Perks has followed suit with its own Access Fund I, which aims to take secondary positions in technology-enabled businesses across Europe.
Svenja Grundmann is an investor at Hambro Perks, where she is working on the firm’s new liquidity fund, headed up by ex-Goldman Sachs executive director Jemma Bruton.
“We think that there’s a tremendous opportunity in private markets, because most of the transactions are primary, there is almost no real liquidity in those markets and all the opportunity is trapped within the secondary market,” she said. “So the idea of the Access Fund is to invest in between funding series, in secondary positions.”
This means targeting companies that are beyond their Series A funding and have a product. “That’s where the Access Fund comes into play and buys secondary stakes from angel investors, from founders, from employees, from management, for various different reasons,” Grundmann added.
So why is this happening now? The maturity of the European technology sector appears to be the driving factor for these new liquidity funds to emerge.
“If you look at the US market, this type of fund has been around for a long time and the big lever here is the maturity. We were the first to set up a dedicated fund but I am sure in the next twelve months [there will be more]. I have already heard of several funds looking at similar things,” Connell said.
“Market maturity means we have over 1,000 businesses reaching an interesting growth stage for us, so it is not a winner takes all market, there is enough space for several different people to do this, but it is great to have a first mover advantage.”
One data point Balderton likes when it comes to launching the liquidity fund is the tipping point of more than 500 European companies having raised upwards of $20 million, which occurred in the last year or so according to its analysis.
“That tends to be a good indicator of them having been able to raise several rounds and existing investors having some confidence in the business. That is not a perfect KPI and there are a lot of businesses we have seen that have been much more capital efficient than that,” Connell said.