Startup share market is booming but has its problems | Technology

As such, the secondary market has served as a welcome way for startups to relieve some of the pressure building up from employees and investors — and it has the potential to become an even more important part of the venture industry’s business model in coming years, industry experts say. 

The bulk of exchanges involve only a handful of the best-known companies. Much of the market is opaque, so it can be difficult to impossible to know what shares are trading for or what they might be worth. Trading can be irregular, costly and slow, particularly when compared with the public markets. And in part because of its opacity, the market has already seen its share of scams.

“I think it’s here to stay for the long term,” said Emilly Zheng, a senior research analyst at PitchBook who focuses on the secondary market. “But … since it’s growing so fast and so much, if there [aren’t] some guardrails in place, it might not necessarily be sustainable.”

The secondary market for startups’ shares has been around for decades, basically as long as there has been a “primary market” where venture capitalists invest directly in and buy shares from startups, experts say. But historically, such deals were rare. 

In general, startups bar investors and employees from selling their shares until the firms go public or are acquired. Traditionally, that happened within five to 10 years, a timeframe that was built into investor and employee expectations and the lifespan of venture funds. The industry looked askance at investors or founders who were trying to cash out early, even if they had good reasons for doing so, the experts said.

“It was weird,” said Sean Foote, a venture capitalist and a member of the professional faculty at UC Berkeley’s Haas School of Business. “It was suspect. It was like a black mark on the company or the fund.”

That started to change around the late 2010s, the experts said. New money streamed into the private markets from the Middle East and companies such as SoftBank, allowing startups to raise additional funds without having to head to Wall Street and face the increased scrutiny and regulatory requirements of public companies. But the delays in going public meant the startups’ early investors and employees started having to wait far longer than in the past to be able to sell their shares.

Then came the COVID-19 pandemic. To buoy the economy, the Federal Reserve flooded it with cash, boosting the stock market and private investment. Many startup funding rounds in the period were oversubscribed, meaning that there weren’t enough shares available for all the investors wanting to buy them, Zheng said.

The secondary market offered a way for such investors to get shares in those companies, and for early investors and employees to get some cash out.

With relatively few companies going public or getting acquired, the number of U.S. unicorns — venture-backed startups worth $1 billion or more, which are often seen as the best candidates for Wall Street — has swelled from fewer than 300 in 2020 to 910 now, according to PitchBook. 

“In the last few years, liquidity has been hard to come by, certainly in venture capital,” said Josh Lerner, a professor at Harvard Business School who focuses on the industry.

Investors and startups started to embrace the secondary market, because “people need money,” he said. “They can’t just wait forever.”

The secondary market takes on a variety of forms. Marketplaces such as Forge Global and Nasdaq Private Market list shares and match buyers with sellers. Companies such as Notice pair potential buyers and sellers with brokers who help oversee such transactions, while independent brokers do the same thing on their own.

But the bulk of transactions, experts say, involves either investors selling directly to other investors or startups engaging in a tender process ini which they allow employees to sell shares on a particular day at a set price either back to the company itself or to one or more investors.

The experts said that it’s difficult to estimate the market’s overall size because it has so many different facets and much of it exists behind closed doors. But there are indications that it’s growing rapidly.

PitchBook estimates the market grew from about $12.5 billion in transactions in the fourth quarter of 2024 to about $23 billion in the fourth quarter of 2025. At about $106.3 billion in total annualized transactions — including shares bought or transferred by venture firms moving their stakes into new funds — the market was only about 10% smaller than last year’s IPO market, according to the firm. 

For Foote — who said he has participated in three or four secondary transactions — the market is a kind of hidden opportunity. Shares are often trading at a 30% discount to the value they were assigned at a startup’s last funding round, he said. And investors can sometimes get those discounted shares on the same day other investors are paying full price for them in a funding round, he said. 

“That’s an amazing deal,” he said.

A growing number of financial institutions have started to recognize the market’s potential. Within the last year, San Francisco venture firm Pinegrove and the enormous institutional investment firm BlackRock both launched funds dedicated to buying startup shares in the secondary market. 

“The market is really rapidly maturing right now,” Zheng said. 

Even so, it still has plenty of shortcomings, especially compared with the public markets. A big one is that there isn’t much buying and selling of shares outside of the biggest startups. 

In the fourth quarter last year, shares of just five startups accounted for 55.6% of all the trading volume on Hiive’s marketplace, according to PitchBook — and 20 companies accounted for 86.4% of the activity there. Exchanges of SpaceX shares alone made up 12.5% of the trading activity on the Augment marketplace, according to PitchBook.

“Suddenly, all of the action is concentrated in maybe a half dozen of these super unicorns,” said Robert Hendershott, a finance professor at Santa Clara University who focuses on startups and venture capital. 

It can also be difficult for investors to know what to pay for shares on the secondary market. Unlike public companies, private companies don’t have to release financial statements, and many investors don’t have the right to view their books.

With few trades taking place out in the open, it can be difficult to know what other investors are paying. And if a company hasn’t raised capital in several years, potential buyers might not even have a fresh valuation to base a bid on. 

Determining an appropriate price is “a big problem for private companies,” said Jay Ritter, a finance professor at the University of Florida.

There’s also a good deal of friction in the market.

When investors buy publicly traded stocks, they often don’t pay commissions these days. But with secondary transactions, the marketplace or the brokers typically get their cuts; the marketplaces charge about 5%, Ritter said.

Investors also can’t just buy and sell startup shares at the drop of a hat as they can with publicly held stocks.

Employees can typically sell their stock only in tender offerings. Sales by investors are subject to the company’s approval; startups can refuse potential buyers they don’t want to have as investors. 

Closing a secondary transaction — from finding a buyer, agreeing on terms and getting the startup’s approval — can take anywhere from two weeks to three months, Zheng said. 

The secondary market “doesn’t function like the regular stock market does,” Ritter said. “Not only are the transaction costs bigger, but you can’t just click a button and say, ‘sell,’ and two seconds later check the price that your trade was executed at.” 

While the secondary market does allow employees to cash out shares, it can pose a dilemma for them that they wouldn’t face if their companies were public, Hendershott said. When a company is public, employees can generally sell as many shares or exercise as many stock options as they have vested and do so on their own schedule. 

But when startups do tender offers, they might limit the number of shares employees can sell. And those tender deals are often one-off events — it might be unclear whether or when another one will happen. That can prompt employees to sell more shares than they might otherwise prefer, Hendershott said.

For employees, such deals are “not an actual substitute” for going public, he said.

And then there’s the potential for scams. Even for more-sophisticated investors, it might not be entirely clear what they are investing in and whether they’re getting what they’re paying for. But less-sophisticated investors may be even more at risk.

The Securities and Exchange Commission generally limits the purchase of private-company shares to accredited investors — those with a net worth of at least $1 million and annual income for a household of more than $300,000. But given the demand for startup stocks, some companies and individuals have been creating funds that allow non-accredited investors to indirectly hold startup shares by investing in those funds.

Some of those funds, though, have allegedly been scam operations. 

In 2024, the SEC charged the managers of funds that were purported to hold investments in pre-IPO companies with defrauding investors. In many cases, the funds didn’t hold the shares the managers claimed they did, according to the agency.

“What these bad actors are doing [is] trying to take advantage of these catchy names and trying to say, like, ‘Hey, this is really hard to get, so this is your chance,’” Zheng said.

Still, despite the secondary market’s risks and shortcomings, several of the experts see big potential for it. 

As long as there remains a big backlog of companies waiting to go public and a relatively closed IPO market, there’s going to be pressure from investors and employees in those companies to sell shares. On the flip side, there are investors who want to get stakes in companies at an earlier stage than when they now typically go public.

Startups have begun embracing the market, and the various players in it are working on ways to speed up transactions, Zheng said. If the secondary market becomes broader and more structured, venture firms could see it as an important alternative to IPOs and acquisitions for returning cash to their investors — and extending the timelines for their funds, Foote said.

The secondary market “could entirely change the way the venture business is structured,” he said. 

If you have a tip about tech, startups or the venture industry, contact Troy Wolverton at twolverton@sfexaminer.com or via text or Signal at (415) 515-5594.