Deal Dive: Most secondary sales in venture won’t look like Tiger’s Flipkart deal

As with many major venture capital investments, the recent acquisition of a stake in Flipkart by Tiger Global Management LLC grabbed headlines and was widely discussed. In fact, the $2.5 billion deal was the biggest bet a mutual fund had made in the Indian e-commerce sector to date.

However, such large-scale investments can often overshadow the secondary market activity of venture capital. In reality, the majority of portfolio company investments are in the secondary market, where existing shareholders of a company sell a part of their equity to new investors.

Secondary sales provide liquidity to founders and earliest investors in a venture and can be especially useful for employees who receive options. Secondary sales also facilitate the diversification of a company’s ownership and the introduction of new strategic investors with specialized knowledge.

The recent surge of private market activity in India and increasing interest of US mutual funds have been major catalysts in opening the secondary market to wider capital flows. Government policies such as the Foreign Exchange Management Act, which regulates foreign investments, allow foreign investors to invest in Indian companies in regulated venture capital schemes. This has enabled the secondary market to grow significantly in size and activity.

However, while the Flipkart acquisition was considered to be one of the largest secondary sales in the Indian venture capital market in recent times, it still does not represent the norm. Most secondary sales are not as large as the Tiger Global deal, so they may not be as visible or make the headlines. For instance, most secondary sales take place amongst existing shareholders or venture capital funds. In addition, these transactions are mostly private, opportunistic deals and, therefore, the deal size and investors involved can vary significantly from transaction to transaction.

Furthermore, shareholder behaviour also plays an important role in the secondary market. Founders, for example, tend to wait for larger upside exits such as an IPO or impact investors may want to monitor the progress of a company for a few more years before they invest, delaying such transactions.

In conclusion, while the investments made by Tiger Global Management LLC in Flipkart was undoubtedly a landmark deal in the Indian venture capital market, it does not represent the size or scope of secondary sales in the venture capital landscape. Secondary sales represent the majority of large venture capital investments in India, and these tend to be smaller-scale deals, often involving existing shareholders in private, opportunistic transactions.