Secondary Deals in Israel, what are they and who are they good for?
In the past few years there has been an increase in secondary fund raising globally and in Israel. Secondary funds are a foundation that purchases existing shares from existing
shareholders, as opposed to a regular investment which purchases a holding of a startup company by issuing new shares in return for cash paid to the company.
Secondary deals have many benefits, in this article we'll go over some of these advantages:
Liquidity - With Israeli venture capitals maturing and reaching the end of their lifespan, the need for purchasing their investment portfolios arises. The length of these funds are usually 7 to 10 years long: while in their lifespan these funds invest in companies, pushing them towards realization (exit). Virtually only a small percentage reach an exit before the end of their lifespan, thus the secondary funds were formed, which liquidize funds by purchasing their holdings and allowing them to return most of the cash to VC fund investors.
Reorganization - Startup companies complete several capital rounds at the beginning of their operations. In many cases this creates a decentralized capital structure with dozens of investors with minor holdings with different conditions and investment goals. This capital structure makes the decision process difficult, creates conflict between the various investors and difficulty in creating value for the company. Secondary funds are used to help reorganizing the company's capital structure in a uniform and limited manner. It eases decision making, introducing strategic partners and more.
Realization before the "exit" - The development of secondary funds insure founders and early stage investors get financial return, however partial, before the company's exit. They don't dilute the remaining investors since the secondary funds purchase existing shares. Secondary funds delay the founders' desire for a quick exit and therefore allows the company breathing room to grow into a mature company while creating higher company value for investors.
Reduction of risk - In recent years, the time from inception until a startup company's exit has been ten years. Secondary funds invest mostly in mature stages in the startup companies, thus reducing the investors' risk, whose stocks in the company constitute a significant part of their fortune and create a return for the early-stage investors.
Prior to founding S-Cube, one of the leading valuation firms in Israel, Gidi founded several startup technology companies, hence his background has positioned him and S-Cube at the unique standpoint of having both the valuation and economic background together with real, hands-on experience in managing companies and raising fund as well as M&A.