Secondary deals reflect sharp falls in startup valuations

Every year or two the valuation of a privately-held startup is reset, usually after raising money. This is in contrast to publicly traded companies that have their valuation updated daily during real-time trading in each session. Even during times when startups struggle to raise money or an economic crisis suddenly begins the valuation of a privately-held company does not change. So a company that became a unicorn (companies with a valuation of more than $1 billion) last year or in 2021, is still perceived as such externally, simply because they have chosen not to raise money and receive a new valuation, which would generally be lower than the previous one.

However, beneath the surface there is a thriving secondary market that reveals the value of shares in these companies and provides a glimpse of their situation. The secondary market involves the sale of shares in the privately held startup shares by employees, entrepreneurs or investors and not by the company itself, usually with the aim of obtaining more liquid money or simply because they have received an attractive offer.

A series of recent share sale deals in startups and privately-held tech companies that has been seen by “Globes” reveals the depth of the tech crisis and the changes that have occurred in the share prices of several prominent unicorns, including Israeli companies.

A 70% decline in the share price

In many secondary deals, shares of startups are traded with significant differences between the share price at its market value – that is, at the time of the fundraising round – and the price at the time of the deal. In other cases, even when the deal has not yet been made, the sellers ask for lower prices.

For example, the price per share of unicorn Gong, an Israeli software startup that has developed an AI-based platform that helps companies analyze sales conversations with customers, was $33.56 after it completed its most recent financing round in June 2021. Today Gong’s shares are being offered on the secondary market for just $9, a more than 70% discount on its 2021 price. However, it should be stressed that no deal has been closed on the matter and any deal will require approval from the company.

The price per share of Snyk, a cybersecurity company, which helps programmers protect their software code, was $12.62 after completion of its most recent financing round in December 2022. On the secondary market its shares are being offered for $7.

Israeli tech company Rapyd, a digital payment platform that competes with Stripe and PayPal, raised money in its most recent financing round at $73.41 per share, according to PitchBook – but its shares are currently being offered on the secondary market for $48 per share. Only last month Rapyd CEO Arik Shtilman said, “Most of the investors in the company have kept our valuation but there are two that lowered the valuation by 12% but we are not bothered by this.”

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But the story is not the same at every company. At HoneyBook, which provides a platform for managing small businesses, the ordinary share price has risen held by the entrepreneurs and employees has risen from $5.40 in January 2022 to $7.35 in December 2022, in the most recent secondary deal that was completed. However, not from the most recent financing round, which was completed in November 2021 when the share price was $9.67, according to PitchBook.

“Globes” also found that the share price of Orca Security fell 41%, Navan’s share price by 36%, Yotpo’s share price by 35% and Place AI’s share price by 18%.

When liquid cash is needed the share price plunges

“The trend in Israel is similar to the global trend, where you can also see large discounts that range from 25% to 75%,” Amplefields Investments secondary fund cofounder and managing partner Moran Chamsi tells “Globes.” But while the global industry is recovering, the domestic market is in a more worrying situation, according to a report by the Israel Innovation Authority published last week. Among other things, there has been a decrease in the scope of capital raising, the number of employees and reliance on foreign investors.

In this situation and due to the bloated value that many tech companies received in 2021, “The discounts in Israel are even greater than those abroad,” says Chamsi. “Many of the companies here knew how to take advantage of the boom in 2021 and the valuation they received was high compared with other countries. In fact, the secondary market is producing a correction to the valuation of the companies that was attached to them in 2021, and in my estimation only half of the unicorns established in Israel still hold such a value today.”

Chamsi, who himself deals in buying and selling shares from companies explains the reasons that bring sellers to his door these days: “People want liquidity, they have taken on certain financial obligations and they need money now. In times of crisis and uncertainty, when it is not possible to know whether the company in which they hold shares will be sold in six months or three years, many prefer to have some financial certainty.”

According to Chamsi, the current economic situation affects the secondary market. “Today there is a desire to get more specific information about the company,” he says. “The companies have to decide whether they go for another fundraising round or not. When more and more people need liquid money, as is happening now, the share price goes down.” Chamsi adds that many startups are not interested in waiting for an exit and want to make money here and now, so they rush to make secondary deals, even at a low price.

“I think that correct criteria for valuations are beginning to emerge. In 2021, the name of the game was how much each company could raise and in how much time it managed to move from one financing round to the next. Today, I think we need to admit the sin in our industry.”

“Continuing to focus on strong sales growth”

Gong said in response, “Gong has not raised any money since its Series E financing round in June 2021. Since then it has not offered secondary plans to employees on its behalf, which would have set a new market valuation for Gong. We focus on sales growth, by leveraging our platform, with which we gain a larger share, in a large and growing target market and from satisfied users, and this while maintaining high operational efficiency.”

Sources close to Orca Security said, “You have to compare the share offered in a secondary deal and appearing in the article, at a value of $7, to the price of an ordinary share from the last fundraising round – which was priced in October 2021 at a value of $9.8. The figures that appear are based on one transaction made by a single employee independently and do not affect the valuation of the company.”

Rapyd, Yotpo, Snyk, PlacerAI, and Navan declined to comment.

Published by Globes, Israel business news – en.globes.co.il – on July 6, 2023.

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