There seems to be a new trend taking hold in Israel’s technology sector. After a year of near-total stagnation, the secondary trade in private technology companies is coming back to life, but this time with an interesting twist: entrepreneurs themselves are leading the movement.
“This is a precedent we haven’t seen before,” Moran Shamsi, managing partner at Amblefields Secondary Fund, tells Globes. “Entrepreneurs and companies are starting to approach secondary funds rather than waiting for outside offers.”
This change represents a radical shift in the attitude of Israeli technology companies towards the secondary market. During 2023 and into early 2024, trading in private company stocks went into a coma. One reason, Shamsi explains, is that there is an unbridgeable gap between the expectations of sellers and buyers. “In early 2024, we saw companies valued at a 60% discount to their valuations, and the two parties simply couldn’t come together,” he says. “It was difficult to bridge the gap between the true value and the value the company had.” Delivery in 2021.” So, while buyers demanded deep discounts in light of changing market conditions, sellers had difficulty adjusting to the significant drop in value. In effect, a situation was created that could be likened to a game of chess – except that in this case neither of players ready to make the first move.
Israeli companies are undergoing a transformation
The new reality of 2024 is creating challenges for technology companies. They were asked to maintain a balanced budget while at the same time retaining their talented employees. New conditions have led to a change in entrepreneurs’ perception of the secondary market.
Many employees at these companies have options, but exercising those options requires the employee to invest the money by paying the exercise price and taxes, without having an immediate way to sell the shares and recoup the money. In contrast, when a company allows its employees to sell on the secondary market, the employee can receive immediate financial compensation. Instead of raising salaries or handing out bonuses — steps that increase company expenses — employees can convert some of their options into cash. In other words, this is a solution that allows companies to retain and reward employees without increasing costs.
This change is also reflected in the numbers. According to data from the world’s largest trading companies, Israeli companies have undergone a transformation. If in the past they feared that selling shares on the secondary market would damage their reputation, today they actually encourage it. Moreover, they are willing to approve deals, even when the stock price is well below the valuation in the company’s latest financing round.
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Among the Israeli companies that embody this change is the financial technology company Tipalti. The company, which has developed an automated payment system for suppliers and has hundreds of employees in Israel, raised capital in December 2021 at a valuation of $8.3 billion. The stock price at the time was $17.12. Today the same lot is offered on the secondary market for $5.50 – a 68% discount.
Another Israeli example is code security company Snyk, which has become a leader in its field. Snyk stock is currently trading at $5.50 per share — a 52% discount to its latest funding round. In the past, the company was worth $8.5 billion, but today the secondary market values it at about $3.5 billion.
Israeli fintech company HoneyBook, a small business management platform that has grown significantly in recent years, is also currently on the secondary market at $5.16 per share — a 47% discount to its last round, which closed at $9.67 per share in November 2021. Sisense, an Israeli analytics company that allows organizations to intelligently analyze data, has seen its value fall significantly. Its shares are currently trading on the secondary market at a 71% discount – with the price falling from $5.20 per share to $1.50. BigID, which develops information security and privacy technology, sees its shares trading on the secondary market at a 46% discount.
Price lists that are similar to the used things selling site Yaad 2
A source operating in the secondary market compares these price lists with the Yaad 2 website (used). According to him, “It shows the prices at which people want to buy or sell. It is important to understand that not all of these prices lead to actual trades, but when the trades expire, the final price usually ranges up to 15% above or below the asking price.” “These are the prices currently ‘in effect’ in the market and this information, which comes from investment bankers, reflects the mood of the market even if the specific trade is not closed at that specific price. In other words – price lists give a good indication of trends.”
“What is interesting is that these cuts do not prevent companies from approving deals,” Shamsi asserts. “On the contrary, we see more and more Israeli companies realizing that the secondary market is an important tool in their toolbox.” He explains that instead of raising salaries or distributing bonuses that affect cash flow, companies can allow employees to sell some of their shares. “It’s a win-win,” he says. “Employees get cash, and the company in turn keeps its cash for ongoing operations.”
Shamsi explains, “These reductions are no longer considered a negative signal. On the contrary, they represent an acknowledgment of the market reality and an understanding that liquidity is a strategic asset.” This represents a sharp change from the approach that prevailed in 2021 and 2022, when companies treated every discount as damage to their reputation.
“The terminology itself has changed, and we are not just talking in terms of discount,” Shamsi says. “There are additional metrics like the multiples that we take into account to repricing a company now, or for example benchmarking against other companies with a similar growth rate or companies with similar activities that are currently trading on the public market.”
A change that makes ratings more accurate
Another phenomenon that emerges from secondary market data is the fact that investors price companies in different ways depending on their field of activity. “We find big differences between different sectors,” Shamsi explains. An example of this can be found in what is happening in artificial intelligence companies. CoreWeave, which specializes in AI infrastructure, is currently trading at a 35% premium to its last round. This is a rare situation that reflects, among other things, the great confidence that the market has in companies working in the field of “hot” artificial intelligence.
In contrast, SaaS companies like Grammarly, which were once the stars of the market, are now trading at a 50% discount to their last round. In the fintech sector, the situation is even more difficult, with companies like Tipalti trading at a discount of almost 70%.
“We are going through an exciting transition,” says Shamsi. “Investors today don’t just look at the numbers, they really dig deep to understand the industry, the technology and the growth potential.” He adds that this change brings more accurate assessments that reflect the commercial reality of each company.
The secondary market has become, among other things, a kind of “bridge” that provides liquidity to investors and employees in the interim period until the IPO window reopens. “We’re talking about a two- to three-year bottleneck for companies that want to IPO,” explains Shamsie. “Nasdaq and other exchanges can’t accommodate tens of thousands of IPOs at once.” As a result, the “impasse” coupled with increasing pressure on companies to demonstrate profitability and positive cash flow is creating significant liquidity pressure in the short and medium term.
Replies
Sources close to Honeybook told Globes that as of today, in some private companies, the main option for investment is through the secondary market, since the companies are not launching new financing rounds. But this creates a big challenge. Investors interested in companies at more advanced stages usually want to invest large sums – around $100 or $200 million. The problem is that employees at companies don’t have enough stock to sell for such large amounts, which makes trades difficult. He adds that, as mentioned, it is possible to buy shares on the secondary market either from employees or from existing investors, but often existing investors are not interested in selling their holdings.
BigID said: “IPO markets for technology companies have been largely closed in recent years. We believe that as markets return to a normal IPO rate, demand for shares of growth companies will also increase and private securities prices will rise accordingly.”
“There are no secondary deals at Tibalti,” Tibalti said. “In Israeli companies, board approval is required for every stock deal.” No response was received from Sisense and Snyk.
Published by Globes, Israel Business News – en.globes.co.il – on January 7, 2025.
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