The U.S. stock market has officially plunged into bearish territory, largely due to steep declines in tech stocks this year. This decline also had ripple effects on private markets. One area of particular note is secondary market platforms, where startup stocks are traded.
There has been a “huge influx of sellers” on secondary markets platform Forge Global this year, according to company COO Jose Cobos.
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In fact, Forge has never had as many sellers on the platform as it does today. The disconnect between supply and demand led to a 9% drop in prices for private companies trading on the platform between the fourth quarter of 2021 and the first quarter of 2022, according to the May 2022 Private Market Update from Forging Global.
Clearly, we see a buyer’s market for private company stocks.
Perfect setup for buyers
When the IPO market stalls, as much of it has this year, the action kicks into private markets. Many private company shareholders still want cash, and with no IPO in sight, platforms such as Forge, EquityZen, and Nasdaq Private Market are especially useful for startup employees or investors who want to cash in as soon as possible.
That said, sellers are rushing to unload stocks, and some companies aren’t selling for the premiums they were just a few months ago.
If you’re looking to buy shares in a private company, now might be the time. “The biggest thing we’ve seen in the first half of the year is that the market has really shifted from a seller’s market to a buyer’s market,” Cobos said.
In April, Forge Global saw a “sharp increase in the percentage of buyers looking for discounted private stocks,” according to the company’s latest report.
Companies on the platform always trade at a premium to their last funding round. That means there’s still demand for those stocks, Cobos said. But in the first quarter of 2022, the premium fell from around 58% over the last cycle to around 24%, according to Forge’s May report.
“Whether you look at public markets or private markets, this is a buying opportunity,” Cobos said. “We have seen prices drop significantly. As long as you have the appetite and obviously the longer-term investing mindset, now is a good time (to buy).
Falling valuations matter
The fall in private company stock prices was spurred by falling public company valuations. After enjoying a record boom during the pandemic, stocks of public tech stocks in particular have been hammered this year as worries about inflation, rising interest rates and Russia’s invasion of Ukraine cause a large sell-off in the market.
Private companies reacted on their own to adapt to the reality of public valuations. Perhaps most notably, Instacart lowered its own valuation from around $39 billion to $24 billion.
More and more companies are also looking to offer their employees liquidity options. With startups staying private longer, private companies “recognize that it’s not fair for an employee to work 13 years before they can sell part of their job,” Cobos said.
“If you don’t give your employees the opportunity to sell and your competitors do, I think it’s going to cause problems in attracting and retaining talent,” he said.
Illustration: Dom Guzman
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