By Malavika Velayanikal for dealstreetasia,
Exits are vital for a startup ecosystem. They improve liquidity because investors can sell their stocks and redeploy those funds into new startups.
Big ticket exits happen with IPOs (initial public offering) or M&A (mergers and acquisitions). But smaller ones lower down the ladder are important too in keeping the pot boiling: those happen when angels and early stage investors sell their stocks in young startups to bigger VCs who come in for follow-on funding rounds.
Now a new marketplace aims to help angel investors sell their startup stocks to VCs. It’s an initiative by Bangalore-based startup market research firm Tracxn, which raised fresh funds from Teruhide Sato and other influential investors last week.
Secondary market for startup stocks
TracxnSecondary is the name of the secondary marketplace which aims to facilitate startup stock transactions by connecting shareholders of private companies with institutional investors. It was launched in India today, but Tracxn plans to deploy it soon in Southeast Asia too.
“We work closely with more than 200 funds globally. There is a huge interest in investing in startups from emerging markets, and in buying secondary stocks. We aim to bridge this gap through TracxnSecondary by helping them [VCs] connect with early angels,” says Tracxn co-founder Abhishek Goyal.
Apart from angel investors, TracxnSecondary also aims to enable employees of startups to sell their stocks. The big drawback of employee stock option schemes is the long gestation period for cashing out as employees usually have to wait for an IPO or acquisition. Now, they will have a new avenue to sell the employee stocks vested in them to VCs who come in for follow-on funding rounds.
Startups in emerging markets may take eight to 10 years to get acquired and tech IPOs are rare in young ecosystems like India. This means long waiting periods for angels and employees to liquidate their shares. Unlocking those funds not only helps angels and employees, but also in funding cool new ideas.
“Angels provide the much needed initial capital to startups. However, as startups mature, although many more institutional investors are willing to invest, they may not always get the opportunity. Through TracxnSecondary, angels can transact with these institutional investors. This in turn will help redeploy capital into new ideas,” says Neha Singh, CEO and co-founder of Tracxn.
Risk appetite for fledgling startups
The number of exits has been on the rise in India. Last year, it even overtook China to be among the top five markets for exits globally. But there’s a caveat: most of these exits are puny compared to the mega M&As we see in China or even Israel.
Still, even the small pops keep the churn going in the ecosystem. A secondary market for angels and employees to offload their shares may increase the risk appetite for investing in the fledgling startups of India and Southeast Asia.
India has seen huge fund flows of nearly US$14 billion in the last couple of years. But lately, there’s been concern over fundamental weaknesses in the ecosystem as a number of startups shut down. Most observers anticipate a tightening of purse-strings this year.