The Secondary Market Of Venture Capital

Venture capital market is still under development in China, and the amount invested is growing year after year. Even though the illiquidity of venture investment is part of the risk, the number of venture backed exit deals(either IPO or trade sale) has been decreasing in the past years in the same the number of investment has been increasing, which lead to further pressure and risk on venture capital fund, especially on their exits opportunity. Those liquidity risks could perturb the venture capital cycle and harm start-up financing cycle.This paper analyses a new exit possibility, the sale of stake in a start-up by a venture capital fund to another venture capital fund. We examine the advantages for both buyer and seller in the secondary market of venture capital. We then measure its performance in China compared to a representative sample of the primary market. Lastly, we analyse the previous transactions to determine the main factors that impact the probability of IPO exit of the investment by running multivariate regression.Even though we found that the secondary market underperformed the primary market, through an analysis of the market, we build an investment strategy that outperform the IPO rate of the primary market. We also expect as the primary market grows bigger and if it is supported by financial reform of the Chinese government, the secondary market would be appealing for venture capital investor and new possible investment strategy be developed.