Vauban's activity has changed due to the recent COVID crisis. We have experienced an upsurge in demand on the startup Single-Deal SPV side for two types of deals in particular:
The typical way of investing in a startup is to buy shares in a funding round, when a company creates new shares that investors buy at an agreed price. In other words, investors purchase shares from the company itself.
A secondary transaction is where an investor buys shares from an existing shareholder instead. The current shareholder will generally be an earlier investor, an employee who exercised their options, or a founder.
Startup shares can be lucrative holdings, but they’re illiquid; you can’t shop with them. In times of financial crisis, for a multitude of reasons, people tend to favour cash and liquidity and are more likely to sell their shares.
On the investors’ side, savvy dealmakers scout for opportunities to offer promising shares at a discount to their investor base.
As mentioned, secondaries opportunities are generally sourced from three types of current shareholders: Earlier investors, founders and employees.
We can group these together as their motivations to sell their shares will generally be motivated by the same reasons:
Secondary transactions generally happen in a very discreet manner as they could send wrong signals to the market otherwise. The founder/employee/early investor looking to exit for cash will typically prefer to discreetly sell all of the shares they want to sell at once, rather than having to complete multiple transactions with several investors.
On their end, investors will welcome the opportunity of being able to invest at a low minimum and with minimum hassle.
This is where dealmakers come in. They will find secondary opportunities through their networks and source investors for the deal, charging carried interest for their work in the process. This is why the use of an SPV is mandatory.
Investors are now (through the SPV) holding shares in a promising startup that they bought at a discount, with (generally) a low minimum and the dealmaker that sourced the secondary, found the investors and created the SPV has gained a carried interest of 20%.
The founder, employee or early investor that sold its shares on its end, has sold its shares in a single transaction to the SPV, minimising associated hassle and noise.