Startup Investors Are Still Finding Ways to Cash Out Despite the IPO Drought
Startup investors are hitting the exits even as companies keep delaying going public.
According to a new report from Nasdaq Private Market LLC, Nasdaq Inc.'s platform that allows helps companies facilitate shareholder liquidity, the number of preferred shares sold on its platform in the first half of 2016 was higher than ever before.
Preferred stock made up 45 percent of all shares that changed hands on Nasdaq Inc.'s trading venue for private companies' stock in the first half of 2016, according to a new report from Nasdaq Private Market LLC. That compares with 19 percent in 2014.
Preferred stock is typically held by venture capitalists and other institutional investors that bought shares after the initial funding rounds, while employees and seed-stage investors usually hold common stock.
Here's a look at the breakdown of the types of shares sold over the past six months.
Much of this is due to the private companies on the platform growing older, said Bill Siegel, head of Nasdaq Private Market. The average age currently sits at nine years, up from eight in 2015, and Seigel expects that number to continue moving higher. The continued IPO delay means we should see even more selling of preferred stock.
"When you have an investor -- an institutional early stage investor -- say I have to close my fund, I have to get out, that's a real catalytic piece of pressure," Siegel said by telephone. "Those investors need to return capital to their own shareholders."
Startups have dragged their feet in recent years when it comes to going public. The private funding market has been flush with cash, driving up valuations for startups. That's left technology companies hesitant to IPO for fear of having to stomach a lower value when facing more discerning public-market investors.
Only three venture capital-backed technology companies have gone public in the U.S. this year -- Acacia Communications Inc., Twilio Inc. and Impinj Inc. -- raising a total $346.3 million, according to Bloomberg data through July 27. Compare that to the 12 IPOs that raised $1.8 billion in the same period of 2015.
With this trend continuing, startups are opting to use platforms like Nasdaq Private to offer liquidity. Nasdaq's platform saw $544 million in stock change hands on its platform in the first half of the year, a 136 percent increase from the first half of 2015. The average size of each share-selling program nearly doubled from one year ago, hitting $45 million.
Siegel said he expects more and more startups to offer access to liquidity, and there is certainly a large pool of startups for that to come from. According to CB Insights, there are currently 168 companies valued at more than $1 billion in private funding rounds.
Correction: This version corrects the spelling of Impinj Inc. and clarifies the definition of Nasdaq Private Market.