Great opportunities on
the secondary market

The “primary market” is where shares of an issuing company are sold directly to an investor. A “secondary market” is when these shares are resold to another investor. This market is often not easily accessible because of a lack of transparency and there is no central marketplace. Supply and demand therefore have to be matched personally in this market. Shareholders of small companies often find it difficult to cash in their shares in the meantime. Secondary transactions offer shareholders the opportunity to sell their shares. These transactions usually take place through so-called “liquidity events” (initiated by the company), where shareholders are given the chance to sell to investors because supply and demand are brought together.

In most transactions, DSTF decides to start with a modest amount for the initial investment. This allows us to take a front-row seat and take ample time to observe how the company makes decisions, how the business evolves, which other investors commit, whether any shareholders are looking for a quick exit, how solid and successful the entrepreneur is in managing and leading their team, etc.

If everything goes excellently, DSTF will certainly consider a larger investment in the next financing round. This approach is discussed with the entrepreneur in full transparency early in the process. A significant discount on the valuation in the next financing round is also negotiated in this initial phase.

During this same period, it may happen that existing shareholders want to exit. DSTF can take a proactive approach towards potential sellers, for example, if things are really going well, by offering them an exit. But there are also great opportunities when the economic climate is unfavorable. People often want to get rid of their investments then. The tougher the market conditions, the more advantageous secondary deals can be. Of course, as a VC, you always need to have cash on hand for this. In these cases, you will also need to adjust your due diligence process accordingly.

In recent months, DSTF has had several opportunities to benefit from extraordinary secondary deals, sometimes with discounts of up to 80% (if “rights of first refusal” have been agreed upon, this must of course be taken into account). Some label this as hyena activity because you are taking advantage of someone else’s weakness. Or is this simply a market mechanism? As a VC, it is your core business to create value for your shareholders. So if you get a great secondary transaction opportunity (because you have certain expertise and an ecosystem), we believe you should definitely consider it! Know that if you don’t do it, your competitor will.

The secondary market has now become a large industry, and there are already VCs who have made it their core business to achieve exceptionally high returns in this way.