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One of Silicon Valley’s biggest investment firms, Lightspeed Venture Partners, is shifting its focus to the secondary market, signaling a threat to the traditional venture capital model.
Lightspeed is applying to the U.S. Securities and Exchange Commission to become a “registered investment adviser,” which would allow it to use more than 20 percent of its funds — the current cap for venture capital firms — to trade in secondary markets, two of the people said. with knowledge of the matter.
Lightspeed, which has around $25 billion in assets under management and is led by Ravi Mhatre and Bejul Somaia, has made seed investments in Snap, Rubrik and Nest. It is among the most active venture capital firms buying secondary stakes in private companies. It has spent $580 million on such deals in the past three years, buying stakes in companies including defense technology group Anduril, software company Rippling and payments platform Stripe.
The aftermath of the pandemic-era tech boom has led to a historic drought in venture funding that has damaged a major engine of Silicon Valley’s economy. Venture capital firms are facing a sharp slowdown in fundraising and exits from their investments through initial public offerings and acquisitions, as well as a collapse in startup valuations, partly due to high interest rates.
Fundraising by U.S. venture capital firms hit a six-year low in 2023, while the value of the investments they made fell 30 percent to $170 billion, according to PitchBook, even amid heavy investment in AI startups. The number of active venture capitalists in the US will drop by 38 percent in 2023, data from PitchBook shows.
Michael Romano, Lightspeed’s Chief Commercial Officer, said: “Due to market dislocation, we were able to buy a lot of very compelling new opportunities at significant discounts of 45 to 50 percent compared to the last fundraising round.”
Lightspeed declined to comment on the SEC filing.
“Without an IPO or any M&A, VCs have to get more creative to identify routes to liquidity,” Romano said. “Secondaries are a really important part of it.
The nascent secondary venture capital market, where investors can privately trade existing stakes in start-ups, has exploded over the past 18 months. Secondary trading volume rose more than 50 percent this year to the end of May compared to the same period last year, according to data provider Caplight. It has become a critical valve for startup investors as it becomes increasingly challenging to exit private market investments.
As a result, major startups such as Stripe, OpenAI, SpaceX, and Canva organized secondary transactions that allowed employees to sell their shares for billions of dollars. The most traded startups in the first quarter of this year, according to Caplight, were Anthropic, Discord, OpenAI, SpaceX, Epic Games, Databricks and Rippling.
As part of its move into secondary companies, Lightspeed has created a data platform to monitor secondary markets and find “discreet” opportunities to buy shares of private companies, according to the firm. In February, it hired Goldman Sachs banker Jack Fowler to lead the effort.
The strategy was partly a response to pressure from Lightspeed’s backers, which include institutions such as pension funds and endowments, to return more capital to investors.
Fowler said Lightspeed has been “aggressive” in its pursuit of the secondary. “The secondary venture capital market is growing dramatically because there is a need,” he said. “The reality is that the IPO window just isn’t open.
Lightspeed invested 20 percent of its $2.4 billion growth fund in secondary deals. Part of Fowler’s role is to work with the CFOs of Lightspeed’s portfolio companies to plan secondary sales of shares.
Lightspeed said: “Our decision to explore the secondary market does not diminish Lightspeed’s commitment to its current investments. We will continue to support our long-standing portfolio companies with the same energy and focus that we bring to new start-up companies.”
Earlier this year, Lightspeed launched a private equity-style “continuation fund” to sell about $1 billion of its stakes in start-ups and free up cash to return to investors.
As many as 19 venture capital firms have become RIAs in recent years, including Andreessen Horowitz, General Catalyst and Sequoia Capital, mostly to invest in cryptocurrencies and continue to hold large stakes in portfolio companies after they go public.