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One of Silicon Valley’s largest investment firms, Lightspeed Venture Partners, is shifting its focus to the secondary market, in a sign that the traditional venture capital model is under threat.
Lightspeed has filed with the U.S. Securities and Exchange Commission to become a “registered investment advisor,” allowing it to use more than 20 percent of its funds — the current limit for venture capital firms — to trade on secondary markets, two said people. with expertise.
Lightspeed, which has about $25 billion in assets under management and is run by Ravi Mhatre and Bejul Somaia, made early investments in Snap, Rubrik and Nest. It is one of the most active venture capital firms buying secondary shares in private companies. It has spent $580 million on such deals over the past three years, buying shares in companies such as defense technology group Anduril, software company Rippleing and payments platform Stripe.
The aftermath of the pandemic-era tech boom has led to a historic drought in venture capital funding, hurting a key engine of Silicon Valley’s economy. Venture capital firms are facing a sharp slowdown in fundraising and withdrawals of investments through IPOs and acquisitions, as well as a collapse in startup valuations, partly due to high interest rates.
Fundraising by US venture capital firms hit a six-year low in 2023, while the value of the investments they made fell 30 percent to $170 billion, according to PitchBook, even amid heavy investments in artificial intelligence startups . The number of active venture investors in the US fell by 38 percent in 2023, according to data from PitchBook.
Michael Romano, Chief Business Officer of Lightspeed, said: “Given the market disruption, we were able to acquire many very attractive new opportunities at significant discounts of 45 to 50 percent compared to the last fundraising round.”
Lightspeed declined to comment on the SEC filing.
“In the absence of IPOs or mergers and acquisitions, VC firms will need to become more creative in identifying routes to liquidity,” Romano said. “Secondaries are a very important part of that.”
The emerging secondary market for venture capital, where investors can privately trade their existing stakes in startups, has exploded in volume over the past eighteen months. According to data provider Caplight, secondary trading volume has grown by more than 50 percent this year through the end of May compared to the same period last year. It has become a crucial outlet for startup investors as it becomes increasingly difficult to exit private market investments.
As a result, prominent startups like Stripe, OpenAI, SpaceX, and Canva have orchestrated secondary transactions that allowed employees to sell billions of dollars in stock. The most traded startups in the first quarter of this year, according to Caplight, were Anthropic, Discord, OpenAI, SpaceX, Epic Games, Databricks and Rippleing.
As part of the shift to secondary equities, Lightspeed has set up a data platform to monitor secondary markets and find “discreet” opportunities to buy shares of private companies, the company said. It hired Goldman Sachs banker Jack Fowler in February to take charge.
The strategy was partly a response to pressure from Lightspeed’s backers, including institutions such as pension and endowment funds, to return more capital to investors.
Fowler said Lightspeed was “aggressive” in its pursuit of secondary targets. “The secondary market for venture capital is growing dramatically because the need is there,” he said. “The reality is that the IPO window is simply not open.”
Lightspeed has invested 20 percent of its $2.4 billion growth fund in secondary deals. Part of Fowler’s role is to work with the Chief Financial Officers of Lightspeed’s portfolio companies to plan secondary equity sales.
Lightspeed said: “Our decision to explore the secondary market does not diminish Lightspeed’s commitment to its current investments. We will continue to support our legacy portfolio companies with the same energy and focus we devote to new start-ups.”
Earlier this year, Lightspeed launched a private equity-style “continuation fund” to sell about $1 billion of its stakes in startups and free up cash to return to investors.
As many as 19 venture capital firms have become RIAs in recent years, including Andreessen Horowitz, General Catalyst and Sequoia Capital, primarily to invest in cryptocurrencies and continue to hold large stakes in portfolio companies after they go public.