Founder liquidity: the much-needed rocket fuel for European startups
Private markets are no longer alternative. Twenty years ago, private assets made up less than 7% of global assets. Now, that share is at nearly 22%. Private equity alone accounts for over $5 trillion of AuM.
Gone are the days where IPOs represented the crown jewel of corporate success. Public listings have been falling for the last two decades; more than ever, money is changing hands privately and high class teams opt to finance growth without the hassle, and risk, of leading a public company.
With an increasing amount of cash available privately, the venture capital ecosystem has consolidated and established a well-oiled formula for founders to turbocharge their business. Top teams are often strapped to the investor-fuelled rocket, with regular 12–18 month A-B-C+ rounds, that only reward them at landing, while starving them along the journey. It is a blessing and a curse — particularly as the journey is, today, longer than it has ever been.
We are here to change this.
A far longer private journey
The traditional IPO is in secular decline. The rise of reporting scrutiny is simply not designed for fast-growth young companies, and the volatility of stock markets can have a dramatic impact on prices: staying private for longer is an increasingly appealing option. For technology companies in aggregate, the median time to IPO has risen from five years to 12.5 over the last two decades — and even SaaS businesses take nine years on average, according to a Crunchbase analysis.
Meanwhile, funds are deploying increasingly more capital at later stages, fuelling mega-rounds left and right. In fact, VC-backed businesses are privately raising almost as much as they would in an IPO — another reason not to float. These ‘private IPOs’ have become three times as common as the VC-backed IPO since 2016.
This means the volume of capital locked in private markets is at an unprecedented high, and funds have adapted to an average lifespan that has grown from eight to 10 years to 10 to 13 years.
The conventional VC model is evolving
Consider this scenario: you bootstrapped your company for two to three years, have just raised your Series A, or later, and now your business is shooting for the stars. In the wake of your first substantial funding round you are growing your team, so you are paying serious salaries for the first time (sometimes far higher than what you have been paying yourself). At the same time as building something extraordinary, you are starting a family, perhaps looking to buy your first home, or have a child — even sending your kids off to university. You and your co-founders own 30–50% of a business that is worth anything from £40m upwards — and yet you are living like you did at the very start of your company. And worse, no one expects this picture to substantially change for another six to 10 years!
This is the reality facing many of the founders building tomorrow’s market-defining businesses. With companies staying private for a decade or longer, founders are at the helm for years without seeing a financial return — even as their company grows in value. This trapped capital leads, understandably, to deep frustration and often misalignment of the exit timing — and value — which, in turn, is detrimental to the business as a whole.
In Europe today, the conventions are rigid and stacked against founders. Many funds are backed by public money, so they can’t offer liquidity at all. Those that do tend only to give the option to their own founders and as part of fundraising rounds.
We know — angels and seed-stage funds are suffering the same fate but that is the subject of a whole separate article! Should we write a Part 2?
The age of secondaries
Outside of conventional primary rounds lies a growing market of private secondary transactions. The existing secondary market essentially operates like a private stock market, with all the perks minus the scrutiny and market externalities for the founders.
The numbers don’t lie: over the past decade, the private company secondary market has grown by 300%, from a few billion a year, to more than $30 billion in 2020. But so far, we have only just scratched the surface.
There is an increasingly significant volume of potential liquidity bound up in these private companies — many of which have reached unicorn status. According to research by Sacra, there is now $1.5 trillion worth of private shares waiting to be unlocked on the cap tables of the world’s venture-backed startups, only $30 billion (2%) of which is currently being transacted each year.
Secondaries need to be baked in from the early stages, and they need to be founders-first. This is one of the largest untapped opportunities in Europe and vastly beneficial for founders and VC funds alike.
As timelines increase, we cannot reasonably expect both to keep founders’ lives on hold for 10-plus years and for them not to be tempted by subpar exits along the way, meaning a disappointing result for investors. Offering founders liquidity allows for incentives to be realigned for the long term. We have seen first-hand how founders, freed up from immediate personal worries, transform and feel empowered to take even bolder decisions: fundamental to build category leaders.
And for funds, this allows us to take larger stakes in outperforming companies without overcapitalising them, which is not always the answer.
Besides the obvious benefits an injection of capital has to an individual, and the above-mentioned benefits of being able to confidently shoot for a much larger outcome (and taking decisions accordingly), it is also an opportunity to refresh their cap tables to align with their long-term business goals.
By being just as diligent with secondary investors as they would be with primary ones, founders can get much more than cash in their wallets, whether that’s a new advocate for their business, or access to a valuable network.
This new era in European venture capital is also marked by the tendency for alumni of the region’s biggest startups to themselves fuel the next generation of companies. The best-known examples of this include the likes of Skype’s former director of strategy Taavet Hinrikus, who went on to build fintech giant Wise and has invested in more than 100 companies over the years.
Beyond cash, founders bring a wealth of knowledge and networks — invaluable when it comes to scaling successful companies! We’re still far from having enough operators-turned-investors on this side of the pond, and founder liquidity can certainly accelerate it.
By enabling this to happen earlier, Beacon allows founders to access the spoils of the value they create, as it’s being generated. That way, a founder’s goals are aligned with ours for a long and ambitious future.
“Secondaries” is a term we’d rather not use — too long has it been associated with steep discounts and access to distressed situations. Founder liquidity, as we refer to it, doesn’t necessarily have to have a discount, and it is the top founders and companies that should have seamless access to it.
Unlocking the value of the secondary market in the maturing European ecosystem
By making liquidity accessible at earlier stages en masse, we can unlock billions in value. If we assume there are 100 companies per year raising Series B where enterprise value is between $100–400 million, and that its founders liquidate up to 10% of their stake that would equate to secondary sales worth $1–4 billion per annum.
At Beacon we’re betting on the founder liquidity horse. (Our team also bets on digital horses, but that’s for another time!). We have set aside half of the fund to invest in post-Series A founders who are building massive, market-defining businesses and looking for liquidity. It’s not nearly as much as the industry needs, so we’d very much welcome more friends in this space!
Whether you’re considering taking some risk off the table or just want to discuss how to bring liquidity up as a topic with your current investors, reach out.
Or if you’re a VC with strong views on the topic, we’d love to hear from you.
