This paper provides the first systematic evidence on secondary markets for equity in VC backed startups, a fast-growing segment of private capital markets. Using proprietary data from a large market maker, we show that shares typically trade at a discount to prior venture capital valuations, with discounts narrowing when buyer demand is strong. We find that market activity responds to new information: in an event study, order flow and prices react quickly to VC financing events. Furthermore, secondary prices are forward-looking and predict future VC valuations. These signals are partially incorporated by mutual funds valuing their startup holdings. By providing both liquidity and price discovery, secondary markets are becoming an integral part of private capital markets, and their importance is likely to grow as startups remain private longer.
Daniel Bias, Vanderbilt University
Johan Cassel, Vanderbilt University
Berk Sensoy, Vanderbilt University