Market insights

11

August 2020

Secondary deals and racing cars: building long term winners

11

August 2020

Market insights

Secondary deals and racing cars: building long term winners

VC money provides the fuel, secondary transactions the oil

We can think of a start-up company as a race car: technology is the engine, seasoned management provides the design, and the founder is in the driver’s seat. One small point, though – this race can last over 10 years (!), from start-up founding to exit. You cannot reach the finish line solely on fuel (VC money). Oil will need changing, perhaps the wheels as well, maybe add a navigator or a second driver. This is where the secondary market plays a dominant role.

Building a start-up into a large business takes a long term plan, and that includes a viable plan of incentives and liquidity for the founders, management and investors on this 10+ year journey.

A successful exit typically takes 6-12 years (or more). This time span may not align with the personal or financial targets of many stakeholders. A founder may wish to pay-off her mortgage, a seed investor may wish to realize his gains after 4-5 years, and management (which has built a world leading company) may wish to see partial financial reward. All these cases may be addressed by a secondary transaction. Such a transaction – where existing shareholders sell some or all of his stake to a secondary buyer like Israel Secondary Fund (ISF) – is the necessary oil change in the machinery. An entrepreneur might sell a portion of his shares while keeping his main upside in the success of his company. The company’s long term employees may reap a partial reward for several years of hard labor, helping motivate and focus the team on the next level of execution. Furthermore, this aligns the interests of the parties – a VC wishes to see the company’s leaders focused on big value, not a quick buck. A small investor wishing to realize gains, can make a profit and be replaced by a secondary fund with the patience to wait out the path required for an IPO. The secondary market provides this service- replace older parts and reinforce the existing ones along a long term journey.

Since 2009, ISF has been involved in over 120 companies. By having us as a minority partner, these companies gained a new equity partner – a $100 million fund which is focused on the long term. We take care to provide added value through creating liquidity in large private companies and supporting those companies by participating in subsequent financing rounds. This strategy has borne fruit in over 30 exits in our portfolio, and in creating great working relationships with dozens of entrepreneurs, executives, funds and other investors. We are happy to start a dialog with any of you about building the next great race car.

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