#25: Secondaries - A Strategic Tool Beyond Liquidity
Primary investments — where fresh capital is injected directly into a startup — dominate discussions and headlines in venture capital. For Corporate Venture Capital (CVC) in particular, most units focus almost exclusively on direct primary investments or convertible structures to align strategic and financial objectives. However, one pivotal yet often overlooked mechanism is the secondary transaction, which can play an essential role in managing CVC portfolios and fostering strategic partnerships.
With the secondary market reaching USD 115bn in closed transaction volume in 2023 — the second-highest year on record — and expected to hit USD 140bn in 2024 according to Blackrock, the importance of secondaries is growing. This market represents 4x growth over the past decade, driven by extended private market phases, a challenging exit environment, and increased investor appetite for liquidity solutions. For CVCs, secondaries offer new strategic levers beyond pure financial liquidity.
This newsletter provides an overview of (1) Understanding secondary transactions, (2) CVC strategy types and use cases for secondaries And (3) Key considerations when structuring secondary deals
1. Understanding Secondary Transactions
A secondary transaction occurs when an investor acquires existing shares from a startup’s current shareholders, rather than participating in a new funding round where the company issues fresh equity. While traditionally used to provide liquidity to early investors or founders, secondaries are increasingly seen as a strategic tool for investors to gain access to high-quality startups.
Secondaries have become increasingly prevalent as startups stay private longer, while early investors, founders, or employees seek partial liquidity along the journey. What was once primarily a financial tool for traditional VCs or private equity funds is now becoming more relevant for CVCs — especially in the current climate of delayed exit markets and capital-efficient growth.
There are several common use cases for secondary transactions.
Founder liquidity, where startup founders sell a portion of their shares — often from Series B onwards — to gain personal liquidity without requiring the company to raise additional funds. This can strengthen the founder’s long-term commitment and prevent distractions from financial pressures.
Exit of early investors such as angel investors or seed funds, who realize returns after the company has reached later stages.
Employee liquidity programs are becoming more prevalent, especially in growth-stage companies. These programs allow employees to sell part of their stock options to reward and retain key talent without waiting for a full company exit.
Syndicate buyouts can simplify cap tables by consolidating smaller or inactive shareholders, particularly in preparation for IPOs or large funding rounds. These transactions improve governance efficiency and allow long-term investors to take larger ownership positions.
2. CVC Strategy Types on Secondaries
There are three core strategic approaches for CVCs when leveraging secondary transactions:
A1) Increasing Existing Stake
For CVCs already invested in a startup, secondaries can offer a unique opportunity to increase ownership without diluting the company or waiting for the next funding round. This strategy is particularly relevant in highly competitive or strategic companies, where expanding the stake can strengthen the partnership and provide greater influence on future decisions.
By acquiring shares from early investors or smaller shareholders, CVCs can signal long-term commitment and secure a more strategic position on the cap table. This approach works best when aligned with the company’s long-term growth agenda — combining the capital increase with deeper commercial collaboration.
A2) Entering as a New Investor via Secondaries
While less common for CVCs, secondaries can also act as a gateway into startups where no primary round is planned or available. This approach allows CVCs to gain access to strategic companies without forcing the startup into unnecessary fundraising.
B) Decreasing or Exiting Holdings through Secondaries
Secondaries can also serve as a structured exit route for CVCs, particularly when a startup’s trajectory no longer aligns with the corporate’s strategic priorities. This may happen when (1) The startup pivots away from the corporate’s core business areas or (2) The portfolio company merges into another business via an equity deal where the CVC’s remaining minority stake is no longer strategic.
3. Key Considerations When Investing via Secondaries
While secondaries can offer strategic advantages, CVCs must navigate several structuring complexities that differ from primary investments. These considerations include:
Governance & Board Seats: Clarify whether (additional/new) ownership translates into (stronger) governance rights such as board seats or observer roles.
Information Rights: Align information rights to ensure ongoing strategic insight without disrupting confidentiality agreements.
Pro-Rata Rights: Secure the right to participate in future primary funding rounds.
Reputation & Signaling: Be mindful that secondary transactions can signal mixed messages if not handled transparently — particularly if founders or early investors are selling at a discount.
Timing: While founder liquidity at Series B or later stages is common in the US, it remains less accepted in Europe — potentially raising concerns among co-investors or corporate stakeholders.
Valuation & Share Class: Assess the share class, seniority, and rights attached to the shares — especially in down markets where discounts are common.
CVCs should ideally enter into side letters or direct agreements with the startup alongside the secondary transaction to clarify strategic benefits, governance rights, and ongoing cooperation particular when entering as new strategic investor.
Conclusion: Secondaries as a Strategic Lever for CVCs
Secondary transactions are no longer simply a liquidity tool — they can be a strategic instrument for Corporate Venture Capital too. Whether used to deepen partnerships, access high-quality startups, or rebalance portfolios, secondaries offer CVCs more flexibility to actively manage their holdings throughout the lifecycle of their investments. The success of secondaries depend on right structure, alignment and communication.
Disclaimer: The views and opinions expressed in this post and under my Corporate Venture Capital newsletter are solely mine as the author and do not necessarily reflect the official policy, position, or opinion of my employer. Any content provided are my personal views and not investment advice.
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