When Instacart went public Tuesday, it became clear that investors who backed the grocery delivery specialist in its last several rounds valued the company at a much higher price than public investors now think it is worth. But secondary market investors who were willing to pay as much as 6% more than the company’s loftiest primary round will take an even bigger hit.
Data from private company secondaries platform Zanbato shows that buyers and sellers were valuing Instacart at as much as $133 per share in 2021. The company priced its IPO at $30 per share and closed its first trading day at $33.70, implying a 75% paper loss for those investors.
The IPO crystallizes the perils of momentum investing, a strategy of buying shares with the expectation that prices will rise rapidly.
Transaction volumes and prices in secondary stock markets spiked in the latter years of the last bull market, especially in 2021. Investors anticipated that buzzy companies would continue to grab increasingly larger valuations from crossover investors or go public at an even higher price.
There was a period when some secondary stakes in companies traded at higher prices than what primary venture investors paid for them, said Hans Swildens, founder and CEO of Industry Ventures, a secondary VC firm that also invests in primary rounds and VC funds.
Stripe sales
The most glaring example of this exuberance was payments powerhouse Stripe.
In 2021, secondary investors in companies were willing to pay well above the fintech specialist’s peak valuation of $95 billion. Zanbato’s index of Stripe stock indicated the market valued its shares at upward of $70 a share for nearly a year after the company’s Series H was valued at about $40 per share in March 2021 by primary investors that included Fidelity Management & Research, Sequoia and Baillie Gifford.
Earlier this year, Stripe was valued at $50 billion in a drastically lower round, which the company took in order to fund a restructuring of employee shares.
“If you bought Stripe stock at a $150 billion valuation, and it was just repriced at $50 billion, you just lost nearly 70% of your money,” Swildens said.
Trading in the secondary market came to a halt last year after the Federal Reserve began to raise interest rates, which spurred valuations of tech public stocks to fall dramatically.
Since then, trading in the direct secondaries market has picked up, but secondhand stock is transacting at much lower prices. Zanbato’s data shows that Instacart’s share value has hovered around $30 a share since April of this year. Meanwhile, the data platform indicates that Stripe’s share price value has been a little above $20 apiece since it closed its latest $50 billion round in March, which valued each share at around $20.
Many of the buyers who paid large premiums during the pandemic-era highs were family offices, hedge funds and retail investors rather than dedicated secondaries funds, said Ken Sawyer, managing director at Saints Capital, a VC firm that invests in secondary company stakes and portfolios.
Many of those investors have higher unrealized losses on their stakes than VCs who invested in the primary rounds.
The IPO window may be reopening, but buyers of those shares are in such a deep hole that they are unlikely to rush back to VC secondaries. “I see that market disappearing,” Sawyer said.
Newer secondary funds focused on private company secondaries will also have challenges, Swildens said.
“You are going to see a bunch of secondary players go out of business because a lot of them over-deployed in 2021,” Swildens said. “Many of our competitors went out of business in the last two big correction periods. Secondaries investing is hard to do well over multiple cycles and survive.”
Featured image by Dragon Claws/Getty Images
Learn more about our editorial standards.
