The secondary market for tech stocks is showing signs of a strong recovery and investor confidence is returning as we enter the second half of 2024. The latest data from major distribution platforms shows key trends that highlight the stabilization of this market after a period of uncertainty.
Recovery and stabilization
According to data from Elephant Sentiment Report, the secondary market for tech stocks has remained stable through the first half of 2024. Sellers have become more discerning and less willing to part with shares at deep discounts. This behavior signals a return of confidence in future valuations and company performance, suggesting that the market is adjusting to more sustainable levels after the violent corrections of the past few years.
Similarly, data from Forge Global confirms this trend, pointing to a narrowing of the deep discounts that characterized the market immediately following the surge in 2021. Both platforms report early signs of a cautious recovery, with investors gradually returning to secondary stocks in sectors with high growth potential, such as artificial intelligence and cybersecurity.
Resilience by sector
Certain sectors are leading the recovery. Elephant data highlights that areas such as artificial intelligence (AI), cybersecurity and fintech have maintained strong investor interest and demonstrated notable resilience despite overall market volatility. For example, companies such as OpenAI and Anthropic continue to attract significant investments, highlighting the ongoing interest surrounding AI technologies. Similarly, the cybersecurity and fintech/cryptocurrency sectors have seen robust deal activity, driven by their key role in the modern digital economy.
These sectors are seen as crucial drivers of future growth and their performance is a positive signal for the secondary market, showing where investors are finding sustainable value.
Understanding the 2021 infection surge and its aftermath
To understand the current recovery, it is essential to understand the historical context. Until early 2021, the secondary market followed established norms: common stock held by employees and early founders generally traded at a 30-50% discount compared to preferred stock in recent funding rounds. This discount was due to the lower financial rights associated with common stock and the lack of liquidation preference. Artificial Intelligence (Image) (Credit: WIKIMEDIA)
But 2021 marked an unprecedented departure from this norm. Fueled by massive demand and soaring valuations, common shares in secondary transactions began trading at a premium over the most recent preferred round prices. This surge was driven by extraordinary investor enthusiasm and soaring technology valuations, making the prices of recent rounds quickly look outdated.
Market correction and restructuring
Beginning in mid-2022, as the technology industry faced significant challenges, this premium for common stocks began to fade. By mid-2022, the market had returned to historical discount levels, with common stocks trading at roughly a 30% discount. This shift continued into 2023, with the discount widening further, reflecting a broader market correction and realignment of investor expectations.
Data from both platforms indicates that the secondary market has experienced significant consolidation, with the deep discounts seen in the 2021 and beyond period often exceeding historical norms as investors recalibrated their strategies in response to the broader market correction.
Market outlook for the remainder of 2024
The latest data highlights the recovery of the secondary market. After a year of significant turmoil among unicorn shareholders, including employees and former employees, optimism is returning to the secondary market. Sellers are no longer willing to offload their holdings at steep discounts, reflecting renewed confidence in the potential for sustained growth and value.
The author is co-founder and CEO of The Elephant Group.
