In this episode of the EUVC podcast, Andreas talks with Alberto Chalon, founding GP of Giano Capital and an expert with a decade of experience in venture secondaries.

Andreas and Alberto dive deep into the sell-side of venture secondaries, exploring the fundamentals that drive the market, the motivations of key players, and the nuances of preparing for a sale. Alberto shares his sophisticated approach to buyer processes, using a quantitative scorecard, and provides a practical guide for sellers navigating valuation, pricing, and legal challenges. Their conversation also addresses the current dynamics and trends shaping the secondaries market, offering a comprehensive look at what it takes to succeed.

At Giano Capital, Alberto specializes in secondaries, drawing on his extensive experience to drive value for both buyers and sellers. This episode is packed with real-world insights and practical examples, making it an essential listen for anyone looking to understand or engage in the world of venture secondaries.

Watch it here or add it to your episodes on Apple or Spotify 🎧 chapters for easy navigation available on the Spotify/Apple episode.

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✍️ Show notes

Understanding the Secondaries Market

Background on what leads to a Secondaries market – why people may want to sell

Background on the Secondaries Market:

* Over the last 20 years, exit timelines have extended significantly.

* In the early 2000s, companies could go public quickly with little revenue, often leading to premature exits.

* Today, the average exit for a company is 12-16 years, often waiting to reach $100 million+ in revenue.

* The IPO market has slowed down, making secondaries more important for liquidity.

* Even when IPOs are possible, companies prefer to exit later as “bigger is better” in terms of valuations.

Opportunity in Europe vs. U.S.:

* U.S. investors are more aggressive, leading to an earlier boom in the secondaries market.

* Europe, as usual, lags behind the U.S. by 5-7 years in secondaries activity.

* In Europe, there is a growing need for secondaries as companies take longer to exit, and liquidity is required.

Types of Sellers in the Secondaries Market:

* Founders and Employees:

* These sellers may have been with the company for 7-10+ years and have significant paper wealth.

* They seek to monetize up to 20% of their holdings for personal reasons like buying property or funding their children's education.

* Selling a portion of their stake keeps them motivated while providing some financial security.

* Early-Stage Investors (Business Angels, Seed Investors, VCs):

* These investors are looking to generate liquidity after holding their stakes for several years.

* VCs, in particular, are under pressure to show DPI (Distributions to Paid-In Capital) to raise new funds.

* Business angels want to cash out their investments to fund new ventures, which aligns with their role as early-stage supporters.

The Role of Intermediaries:

* In the U.S., intermediaries (like brokers) often handle deals, though they might not provide full support.

* In Europe, large banks (Goldman Sachs, Morgan Stanley) or M&A boutiques sometimes manage secondaries, especially in deals over $30-$50 million.

* For smaller deals, direct interaction between the buyer and the seller, like Giano Capital’s approach, is more common.

US vs Europe - what to keep in mind

Mindset is very different, most US investors are more risk takers

Mindset Differences:

* US Investors: Generally more willing to take risks, which drives more aggressive investment strategies and early adoption of secondary transactions.

* European Investors: Tend to be more conservative and risk-averse, with slower adoption of secondary markets, trailing the US by about 5-7 years.

Regulatory and Market Structure:

* US Market: The ecosystem in the US allows for more fluid transactions due to transparency and access to information.

* Public filings and accessible data on private companies allow investors to make informed decisions more easily.

* European Market: Private companies maintain more confidentiality.

* Investors need to work harder to get access to founders, management teams, and financial data, requiring a more relationship-driven approach.

* This limitation slows down secondaries and makes the process more complex compared to the US market.

Access to Information:

* In the US, investors can often rely on public data and readily available information on private companies to make decisions.

* In Europe, due diligence relies heavily on personal access to management, cap tables, and private company information, often requiring direct conversations and strong networks to get the necessary data.

Cultural Approach to Growth and Exits:

* US: Investors focus more on rapid growth and taking companies public earlier in their lifecycle, even before reaching high revenue milestones.

* Europe: Companies tend to stay private longer, often waiting until they reach $100 million+ in revenue before considering an exit. This extended timeline provides more opportunities for secondary transactions in later stages.

Key Players and Stakeholders

Types of Sellers: Categories and Motivations

* Employees & Founders:

* Motivation: Over time, these stakeholders accumulate value in their equity but often need liquidity for personal reasons.

* Impact: Selling part of their equity allows founders to stay committed to the business, while managing personal financial risk. This enables them to support their family or buy property, keeping them motivated for the long run.

* Early Stage Investors:

* Business Angels (BAs):

* Motivation: BAs have typically already seen large returns on their investment. They are often eager to exit after having added all the value they can.

* Impact: Happy to clear their position, take the rewards, and move on to the next project.

* Seed and Round A Investors:

* Motivation: These investors usually need to secure liquidity well before the final exit to maintain credibility.

* Impact: To successfully raise a follow-up fund, they need to show a healthy DPI (Distributions to Paid-In Capital), requiring partial liquidity events.

Role of Intermediaries for Sellers:

* Types of Intermediaries:

* US Market: Filled with brokers who facilitate both supply and demand in secondary transactions.

* Europe: Fewer intermediaries; here, banks and M&A boutiques (like Goldman Sachs or Deutsche Bank) handle secondary deals in a manner similar to primary transactions, but only when there’s a formal process in place.

* Impact of Intermediaries:

* For smaller, off-market secondaries, it’s more common for the deal to happen without an intermediary’s help. The process is more relationship-driven, and sellers often need to be prepared to manage the sale directly.

Buyer Process:

* Approach of a Sophisticated Buyer:

* Treating Secondaries Like Primaries: A serious buyer treats a secondary transaction with the same level of due diligence as a primary investment. Sellers should expect to share just as much information.

* Key Information: Buyers will request detailed financials like the P&L, budgets, and 3-year plans, which will be fed into their decision-making scorecard.

Alberto’s Process:

* Quantitative (Scorecard):

* Giano Capital uses a 14-step scorecard focused on essential KPIs: CAC, profit margins, revenue growth, etc.

* Screening: In the past year, they screened 100 companies and invested in only 3, while keeping others for potential future deals.

* More Quantitative Detail:

* Giano Capital engages with the most strategic managers (CFO, CMO, and CEO) to deeply understand the company’s numbers and future trajectory.

* Forecast Reliability: A major focus is on testing how reliable the company’...