The Enduring Power of the Secondary Market in Venture Capital

Now that the secondary market has endured both stagnant and booming venture environments, it has proven its long-term staying power as a reliable strategy for maintaining liquidity and accessing venture capital.

Key Points

Investors are increasingly turning to direct secondary markets as release valves for liquidity in the VC landscape, particularly as hold times lengthen and companies remain private longer.
Secondary transactions provide much-needed opportunities for investors and employees of VC-backed private companies to realize returns in an environment where IPO activity has declined.
The size and ongoing growth of the venture capital space signal a promising future for direct secondary markets as a mainstream liquidity solution.

What Are Secondary Financial Markets?

Secondary markets are platforms or mechanisms that allow investors to buy and sell securities—such as stocks, bonds, and other financial instruments—after they have been initially issued. In venture capital, companies issue shares during primary funding rounds (e.g., Series A, Series B), while secondary transactions refer to the purchase of shares from existing shareholders, not directly from the company.

Typically, companies set the total number of shares and allocate them by funding round, based on company valuation and capital targets.

In this article, we focus on how secondary transactions—including tender offers and direct secondary sales—offer stakeholders a liquidity option and a way to realize returns in the absence of traditional exit events like IPOs. We’ll also explore regulatory hurdles, transparency challenges, and the long-term advantages of these transaction types.

How Have Secondary Financial Markets Evolved?

According to Q3 2024 Analyst Note: Exit Alternatives for US VC by Emily Zheng, senior analyst for venture capital at PitchBook, expectations for US VC-backed IPOs in 2024 have dropped to their lowest level since 2016. Only 37 companies went public in H1 2024, generating $28.4 billion in total value.

“Secondaries have evolved since the highs of the pandemic era when the market was used to gain access to oversubscribed rounds.” — Emily Zheng, Senior Analyst, PitchBook

Oversubscriptions occur when demand for investment exceeds the amount of capital a company intends to raise in a funding round. Investors often turn to the secondary market to avoid missing out.

However, two years into an IPO drought that began in 2022, VC firms are leveraging secondary sales to return capital to their limited partners and fill the gap left by a lack of exits.

Zheng’s analysis also reveals significant growth in secondary-focused funds—evident in StepStone’s record-breaking $3.3 billion raise, the largest VC secondary fund to date. Furthermore, four of the ten highest-valued U.S. startups are preparing to launch tender offers in the first half of 2025, indicating broad adoption.

“The narrative has shifted recently because fundraising, dealmaking, and exit activity aren’t as robust as they were during the zero interest rate policy era,” Zheng notes. “Now, the secondary market is a way for sellers to access much-needed liquidity. With current discounts, secondaries provide buyers with lower entry points—whether new investors or existing ones increasing their stakes.”

Types of Venture Capital Secondary Transactions

Secondary sales take many forms, allowing investors—such as employees or early-stage backers—to sell shares to other parties. These include:

Tender Offer

A tender offer is initiated by the private company itself. It gives employees, early investors, and other eligible shareholders the opportunity to sell a portion of their shares at a set price while the company remains private. These offers are typically facilitated through secondary platforms like Zanbato.

The company must issue a notice, and per SEC rules, shareholders have 20 business days to decide whether to participate.

Key characteristics:

Participation may be limited to specific equity types (e.g., stock options), excluding RSUs.
The company can set limits on who can participate and how many shares can be sold.
Former employees may be excluded if they don’t meet eligibility criteria.

Direct Secondary Purchases

Direct secondaries involve a fund or investor reaching out to a shareholder who’s willing to sell. The company is not the initiator but must approve the transaction.

Key parties might include:

Dedicated secondary funds
Institutional investors
Family offices
High-net-worth individuals (HNWIs)

These transactions offer early liquidity to stakeholders without requiring a full company exit.

Secondary Exchanges

Platforms like Forge and Zanbato serve as marketplaces for buying and selling shares in private companies. These exchanges help match buyers and sellers, enabling access to high-profile startups for investors previously locked out of primary rounds.

What Is the Right of First Refusal (ROFR)?

The Right of First Refusal (ROFR) is a provision often found in shareholder agreements. It gives existing investors or the company the right to match an external offer before the shares are sold to a third party.

ROFR impacts secondary sales in the following ways:

In tender offers and direct secondary purchases, ROFR ensures that current stakeholders can maintain their ownership positions.
Declining ROFR can signal weak demand or valuation concerns, potentially deterring future investors.
While protective, ROFR provisions can create friction and delay liquidity events.

Companies often enforce ROFR to manage valuation expectations and control shareholder composition.

Advantages of the Secondary Market

Direct secondary markets provide essential benefits, especially in a market where liquidity is scarce:

Liquidity for Illiquid Assets: Early investors and employees can realize gains without waiting years for a public exit.
Access to Competitive Startups: New investors can acquire equity in desirable private companies outside of traditional VC rounds.
Price Discovery: Secondary transactions serve as an informal valuation benchmark before IPOs.
Mitigation of Volatility: Allowing shareholders to sell in advance can reduce post-IPO volatility.
Investor Rebalancing: Early-stage investors can exit, while long-term holders with higher risk tolerance step in.

Challenges in Direct Secondary Markets

Despite growth, the secondary market faces notable limitations:

Transparency Issues: Transactions are often private, making it difficult for new investors to evaluate opportunities.
Legal and Regulatory Hurdles: Shareholder agreements, SEC requirements, and company-imposed restrictions add complexity.
Unique Risk Profiles: Shares in each company carry unsystematic risks, as direct secondaries don’t offer portfolio diversification.
Limited Supply & Participation Restrictions: Companies may restrict resale rights, impacting who can participate and under what conditions.

Overall, every secondary transaction is shaped by the unique terms of the company involved. Due diligence is critical—but often challenging due to opaque deal structures.

How Secondary Transactions Reshape Ownership

The secondary market doesn’t just create liquidity—it transforms ownership dynamics:

Early-Stage Investors Exit: Those who entered at seed or Series A may not want to hold long-term and can reallocate their capital to new ventures.
Long-Term Capital Joins: New investors aligned with longer horizons—such as crossover funds—bring stability.
Strategic Cap Table Management: Companies stay private longer, and facilitating secondaries ensures their cap tables reflect active, engaged shareholders.

Looking Ahead

Secondary transactions are no longer on the periphery—they’ve become a cornerstone of modern venture capital. With the IPO window narrow and fund cycles under pressure, secondary markets offer a pragmatic and strategic alternative.

They’re not just about liquidity. They’re about continuity, flexibility, and keeping capital flowing in a startup world where exits no longer follow a fixed timeline.