A Primer on Investing in Private Secondaries
Intro
For more than ninety-nine percent of people in the United States, the world of investing opportunities is the same: you can invest in companies in the public market. Outside of that, your portfolio is probably simple. Maybe you buy a home for yourself, or invest in some real estate to rent. Maybe you get into a niche alternative asset, like wine or antiques. Maybe you buy some precious metals.
But, as a general rule, your options are clear: Vanguard funds. The S&P 500. Picking individual companies, if you feel confident in a specific company's direction. This is how the story goes for most.
Then there is the less-than-one percent of investors—the kinds of people you read about online. These are the venture capitalists who got access to startups long before they went public, the investors who saw returns that would generally be unfathomable in public markets. These are funds like Sequoia, which invested in NVIDIA in 1993, or Y Combinator, which got in early on Stripe in 2009. These are investors who were able to invest in startups on the private market, long before the general public had a chance to get access.
But investing in private companies tends to be shrouded in mystery. Sure, you hear the stories about VCs making off with billions—but what if you want to get in on some of that investing, too?
The good news is that you can, via something called private secondaries. While becoming a VC and investing in startups’ funding rounds directly can be rather complicated and is an essay for another day, private secondaries offer an opportunity to invest in private companies that you have confidence in. And you don’t have to be a well-connected venture capitalist to do it. The rest of this essay is a primer on private secondaries: what they are, why you’d want them, and how you can get started.
A short definition of private secondaries
There are two main ways shares of a private startup can be sold:
Directly from the company to investors. These are called primaries.
From one shareholder to another. These are called secondaries.
When you see those bold headlines, like “Airbnb closes $1B round”, you are reading about primary transactions—where the company is selling shares to, usually, venture capitalists. During a primary transaction, the shares being sold are being sold for the very first time.
Some time after that Airbnb round, though, some of its investors may want to liquidate some of the shares they’ve purchased. So they’d look for potentially interested investors (like you), and sell their shares directly to you. That’s a secondary transaction, and if you’re at all familiar with the way investing on the public market works (one investor selling to another), then you understand the concept here.
Why invest in private secondaries
The public market can be great. For example, NVIDIA grew 37X over 2 years. Facebook grew 20X over 4 years. But the private market can offer investment upside—and other benefits—that is rarely seen in public markets. Below are the primary reasons you may want to consider secondaries.
1. High upside potential
The mere existence of a company on the public market means that it has
Already proven itself to investors
Has decided to go public.
This is a massive step for companies. Most startups, even the ones that see degrees of success, don’t make it to a public IPO.
While this means public companies can sometimes be safer investments, it also means that a substantial portion of the upside potential has already been realized. If you bought NVIDIA in 2017 on the public markets, you would have seen a significant gain by today—but what if you had bought NVIDIA before it even had an IPO? The difference is exponential. While this is somewhat of a generalization (every company is different), private companies can often offer higher upside potential than public ones.
Part of the higher upside, of course, means you may encounter higher risk. Investing in a Series D company on the private market is generally a much riskier decision than investing in a well-established public company, like Apple or Google. But, of course, the upside may be higher.
2. Invest in the companies you really believe in
Many of the world’s most famous, and impactful, companies are not public. Stripe processed one percent of the global GDP in 2023, and it is private. SpaceX built the first orbital rocket capable of landing and flying again, and it is private. Being a great company is not synonymous with being a public company.
There’s a good chance you have not just heard of companies like these but may want to have a financial stake in their success. On the public markets, that’s simply not an option for many of these companies (like Stripe and SpaceX).
It’s also possible that you have insight into an industry that few others do. Perhaps you’re a doctor and think you have a unique edge in evaluating healthcare companies; or you’re an engineer and have a strong opinion about a particular piece of software.
No matter your reason, private secondaries give you an opportunity to invest in the companies you truly believe in—even if they aren’t available to the general public.
3. Tech companies are staying private for longer
It used to be that, if a company was successful for long enough, there was a good chance it’d go public. That assumption doesn’t ring quite as true these days. Successful companies are taking longer to go public, if they even go public at all (private acquisitions are common). It’s now common for companies to reach $10B+ in value before they even go public, which means that the only way to get exposure to these companies—at least until an IPO—is in the private markets.
The reasons for this are complex, but the outcome for you means that it’s increasingly difficult to invest in today’s best companies if you’re limited to investing on the public markets. Diving into the private secondaries market is, today, increasingly one of the only ways to get exposure to some of the world’s most promising and important companies.
4. Diversify your portfolio
You’ve probably been told at some point in your life that you need to have a diverse portfolio. While the definition of "diverse" and your own personal goals are the only way to know what you should personally do, it’s true that investing in private secondaries can get you exposure to companies that you wouldn’t have otherwise been able to invest in.
We can’t tell you whether investing in private secondaries is a good or bad kind of diversification for your portfolio—that’ll come down to your current portfolio, your goals, and the companies you choose to invest in. What we can tell you is that private secondaries can be one way to diversify.
Who can invest in private secondaries?
While there are some exceptions, you generally need to be an accredited investor to invest in private secondaries. That means you’ll need to fall into at least one of these categories:
Income: You earned $200k annually (or $300k with a spouse) in both of the past two years, and you have expectations of similar earnings this year.
Net worth: You have a net worth of over $1M—not counting your primary residence.
Certifications: You hold relevant financial certifications (e.g. you’re an investment adviser).
The reason these rules are established is straightforward. Investing in private markets carries a number of risks that investing in public markets may not, and the U.S. government has decided that these kinds of investments should be accessible only to people who can afford to take the risk and/or people who have specialized knowledge to make these kinds of investments. Partly the rules also exist because private secondary investments often have minimums, from $25k all the way up to $250k and beyond.
That sounds rather scary. But the risks are relatively easy to understand: private secondaries are illiquid (selling them is more complex than just clicking a button), and private companies can be more unpredictable and more likely to fail than public companies. These reasons, as you may notice, are also part of the reason that investing in private secondaries can offer more upside.
How to get access to private secondaries
Unlike the public stock market, there are not hundreds of brokers you can sign up for and start buying private secondaries within the span of an afternoon. Buying private secondaries generally requires more work both upfront (finding a way to buy them), and before the purchase (doing due diligence and getting a deal done). In the past, this was difficult to do without a broker.
Today, though, there are more accessible ways to access private secondaries. At GoodFin, we’re building a new way to get into alternative investments—like private secondaries—without having to navigate complex broker processes or deal with inaccessible investment minimums. The process on GoodFin is simple: You can easily view and invest in private secondary offerings directly from the platform.
1 Risky defined here as the probability that your investment will eventually end up at $0.
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