Venture secondaries are having a breakout moment, with market volume surging to $16 billion in 2024.¹ At NewView, we’ve seen a significant increase in demand for both our direct secondaries and portfolio offerings as GPs look to increase DPI and manage years of portfolio growth. But amid the growing enthusiasm, we’re also seeing persistent blind spots. Chief among them: the reliance on “discount to last round” as the primary underwriting metric.

The discount-driven approach to secondaries has its origins in private equity secondaries. However, traditional private equity pricing is more tightly banded and less volatile than venture capital—and therefore more suited to the use of simple discounts. We believe that applying the same strategy to venture is overly simplistic, posing a threat to returns.

The pitfall of discounts

The concept of a "discount to last round" refers to investing in a company's shares at a lower price than the valuation it received in its most recent round of equity funding. As brokers and secondary exchanges pitch 50 to 75% discounts, it can be tempting to chase a bargain. However, this approach does not account for several critical factors:

1. Mispricing and market dynamics

Last-round valuations, particularly marks set prior to the market correction in late 2021, may not reflect a company's true worth. It is also potentially misleading to solve for discounts in line with the corresponding correction in market comps. For instance, as Bill.com’s (NYSE:BILL) stock eclipsed $300 a share in November 2021, hot fintech deals were being priced at >100x NTM revenue (some with negative gross margins) Bill’s ~65% stock price decline from its peak is likely not sufficient to account for historic private market premiums or missed growth targets at those private companies. In other words, while significant, a 65% discount may not be high enough to signal a fair entry price.²

2. High-water marks and preference stacks

History suggests that companies trading at extreme discounts often bear the burden of an unreasonably high last-round valuation. They may struggle to raise future capital at favorable terms and often have already raised considerable capital relative to their revenue scale. This, coupled with the potential for structured equity at the next round, means that preference stacks could account for the vast majority of value at an exit. In the worst-case scenario, a company may even exit at values beneath its preference stack, leaving common stockholders and early preferred shareholders with no payout. When this occurs, a significant discount proves to be irrelevant.

3. Information asymmetry

While it is more common than ever for early investors to sell shares, buyers must still consider whether sellers possess knowledge of negative factors unknown to the buyer. A seller’s willingness to transact at an extreme discount may be an important red flag. At the same time, shares of high-performing companies still trade at more modest discounts as insiders are less willing to part with their holdings (see the chart from Forge Global below). As such, we believe it is not possible to make an informed underwriting decision based largely on a discount figure.

The importance of fundamentals

We believe prioritizing discounts overlooks much more important criteria: business quality and growth-adjusted entry multiples. Since our founding, whether evaluating a primary or secondary investment, we believe in the importance of identifying high-quality businesses with tremendous potential. Over more than two decades as an investor, I have learned:

1. There is no substitute for quality

Time and again we find that the quality of a company’s CEO and team has the most significant impact on returns. This, coupled with tried and true factors like market opportunity, product, and competitive landscape, should form the basis for any investment decision—private or otherwise.

2. Compare apples to apples

With a renewed appreciation for market realities, we see investors pointing to public company growth-adjusted multiples as a useful heuristic for pricing private rounds (see, for example, here, here, and here). Even when the IPO window opens, the most prized companies still must trade on a level playing field.

3. Give credit where it is due

Despite common perception, we believe that not all startups were overvalued in the past several years. We saw more than a few founders and boards maintain fair valuations and their businesses have continued to grow nicely. Pricing with fresh eyes can ensure that investors do not miss out on great opportunities by expecting a deep discount.

4. Do the work

‍Some secondary buyers may suffer from limited access to company information, instead turning to discounts in an effort to identify attractive deals. Investment diligence, on the other hand, requires data and real effort. Ultimately, we believe that secondary investors will be best served by fundamentally underwriting a company’s forward performance, evaluating its current and future capitalization, and considering its long-term prospects. Companies are often disqualified from our funnel based on true business prospects, such as growth, burn profile, competition, and market size—and high discounts are frequently a negative indicator of business quality.

Focus on intrinsic value

At NewView Capital, we believe the fallacy of discounts can lead investors astray by offering illegitimate risk mitigation and emphasizing short-term gains. 

In venture secondaries, it is important to look beyond the superficial allure of a "discount to last round." It is far more critical to focus on identifying quality businesses at attractive prices (read: multiples). By focusing on these fundamentals, investors can make more informed decisions, foster healthier relationships with portfolio companies, and be better positioned to build a portfolio of companies that are not only strong businesses—but also sound investments.