Not many investors are aware of the secondary markets. For those that know their way around, secondary markets can be a fantastic place to pick up shares in private companies before they go public. And they are also useful to track as they are a barometer for what’s happening with private market valuations.
There are a few major brokers – and a ton of boutique firms – that specialize in secondary market offerings. These companies act as a market maker between those who have shares in a private company that they’d like to sell, and those who are looking to pick up shares in that private company.
Secondary markets can have offerings that are relatively small, just six figures, and are only available to accredited, qualified, or institutional investors. That’s why it’s difficult for me to research and recommend secondary offerings at Brownstone Research… but it is an investment approach that I have used myself on many occasions.
But aside from the investment opportunities in secondaries, there are always good insights that can be gained from tracking these markets… And needless to say, the last six months have been interesting…
I’ve been watching closely as many privately traded companies have seen their shares trade down in the private secondary markets. We can see a few examples with large technology names above, like Bytedance, Stripe, Klarna (which we discussed last week), and Discord.
There are of course many exceptions. Above we can also see SpaceX, which continues to dominate and make incredible progress in the aerospace industry.
Many private companies continue to grow, meet their milestones, and increase their valuation in subsequent funding rounds, even in a difficult economic environment. It’s one of the things that I love about the private markets… As long as they continue to make progress, they are largely immune from the volatility of the public markets.
But those companies that got ahead of themselves on valuation, like the ones shown above, will see a compression in their valuations similar to what has already happened in the public markets. And we’re clearly seeing that right now.
The interesting dynamic in the secondary markets right now is that transactions have slowed down dramatically. Technology companies often help employees sell a portion of their private shares as a way to provide some liquidity and motivation to employees who may have been locked up holding their equity for 5–10 years.
The problem is that there is a gap right now between what sellers want for their shares, and what buyers are willing to pay for those shares, given the decline in valuations due to the current market volatility.
This kind of stalemate usually shakes out within a quarter or two and the secondary markets return back to normal transaction levels.
While declining valuations may look and feel like a negative, they are natural to see, especially in overhyped and/or overvalued companies that ran up too far too fast. In that sense, I like to see a return to more rational valuations as it is an early indicator that market conditions are setting the foundation for future growth.
A brand-new form of air transportation…
We have talked a lot about electric vertical takeoff and landing (eVTOL) aircraft in these pages recently. These are large electric-powered drones capable of moving cargo and people over relatively short distances – 100 to 150 miles.
Most eVTOLs are quite small, only capable of carrying four people. This is for a reason. The weight of standard lithium-ion batteries and their energy density are such that the aircraft needs to be small in order to carry payloads (people or cargo) at a reasonable distance. This is why we haven’t seen any commercial aircraft powered by electricity.
However, there is another approach to electric air travel that can operate within today’s available technology. And outside of drones, I believe that it will be the first commercial application of electric fixed-wing commercial aircraft: Seagliders.
A company called Regent – whose vehicles we last discussed back in February – is making great progress with its Viceroy Seaglider.
This is a beautiful aircraft designed to travel between five and 30 feet above a body of water. It has about a 160 nautical mile range and can travel at speeds up to 180 miles per hour. It can carry up to 12 passengers plus two pilots.
The reason it works so well is that the seaglider takes advantage of what’s called the “wing-in-ground” (WIG) effect. This is a basic principle of aerospace engineering.
The WIG effect refers to the fact that aircraft flying just above the surface of water generate greater lift, as the displaced air pushes up off the water. This creates something of a cushion between the water and the aircraft. And it reduces the amount of thrust required to keep the aircraft in flight and power the aircraft forward.
Seagliders taking advantage of this principle can get a lot more distance with less power. That’s why this approach makes so much sense. And it’s catching on…
Regent just inked a deal with Hawaiian airline Mokulele Airlines to create a seaglider network across the Hawaiian Islands.
As we can see, seagliders will be able to quickly shuffle people from point to point throughout the Hawaiian Islands. This makes so much sense.
And get this – commercial flights are expected to begin by 2025. It’s just three years away.
So I look at this, and it doesn’t take much imagination to see similar networks being used to connect coastal cities on both the East and West Coasts of the U.S.
For example, a seaglider service running from Boston to New York would be fantastic… as would a service to get people from San Francisco to Los Angeles very quickly.
Of course, the same holds true for routes connecting major cities all around the world. There are routes throughout Europe, the Middle East, and Asia that could efficiently connect major population centers.
And there’s one other key dynamic that seagliders have working for them…
Because the craft is flying over water and close to the surface, it’s regulated more like a boat than a plane.
In the U.S., this puts seagliders under maritime regulations, not the Federal Aviation Administration (FAA). This means the path to regulatory approval is much quicker.
So I’m very excited about the work Regent is doing here. We’ll keep a close eye on the company going forward. And I can’t wait to see how the first seaglider services perform in real-time. That might be a great excuse for a trip to Hawaii… nothing like boots-on-the-ground research.
A major milestone for quantum-resistant cybersecurity…
We have been following quantum-proof cryptography ever since Google achieved quantum supremacy back in September 2019.
As a reminder, “cryptography” is the technique we use to encrypt our data, information, and communications. For decades, we’ve all been using encryption technologies like AES-256 and SHA-256, as well as RSA for public key encryption. These are the key technologies that we all use every day, and don’t even realize that we’re using them.
But these technologies are all but useless in a world where powerful quantum computers exist. A powerful enough quantum computer can crack our existing cybersecurity in a matter of minutes or even seconds. Which is why the National Institute of Standards and Technology (NIST) set out years ago, in 2016, to evaluate a variety of new quantum-resistant algorithms.
Many “experts” have said that we’re still a decade away from quantum computers getting to that point – But I disagree. I predict that we have no more than a few years left based on the rate of progress that we’ve seen in the last three years. That’s why this is such an urgent topic.
Days ago, the industry just reached an important milestone. NIST just selected four algorithms to replace our current standards. This was after six years of evaluation and several rounds of competitions.
These algorithms will power quantum-proof encryption across the internet as well as email and other communication services. This is great news.
That said, it’s not going to be an overnight process.
NIST will need to synthesize these new algorithms into formal standards. The current plan is to do so by 2024. And after those standards are finalized, then the IT industry is going to adopt those standards and implement them into their products.
For most, this will be a once-in-a-generation process of upgrading all hardware and software systems. This is something that will take at least a decade.
So it’s a race against time. We have a short window to implement these new standards and upgrade everything before quantum computers advance too much further. We can’t assume that only the “good guys” will have access to quantum computing technology, which is why this matter is so urgent.
This is a great step forward. The faster NIST finalizes the standards, the sooner the industry can start building those standards into their products.
A next-generation CRISPR therapy just entered human clinical trials for the first time…
We’ll wrap up today with a huge development in the biotech space.
Longtime readers may remember early stage biotech company Verve Therapeutics. I profiled Verve in The Bleeding Edge about two years ago.
Verve is developing therapies using what’s called a “base editing” approach. This is a newer derivative of CRISPR technology designed for even more precise edits.
It enables us to make specific edits in DNA without needing to cut and repair the strands of DNA. That’s what sets it apart from the original approach to CRISPR.
Using base editing, Verve has developed a therapy designed to reduce bad cholesterol levels. And the results have been stellar…
In non-human primate (NHP) testing, this therapy reduced bad cholesterol levels by 60%. And the NHPs maintained low levels of bad cholesterol for six months after treatment.
These are fantastic results – so much so that Verve Therapeutics is advancing this therapy into human clinical trials.
This is the very first time that a next-generation CRISPR therapy is being tested in humans. This is another exciting milestone.
And here’s the best part – Verve Therapeutics is tackling a massive market here. That wasn’t the case with the early CRISPR therapies that have entered clinical trials.
There are millions of people who have high cholesterol. Meanwhile, the diseases that first-generation CRISPR therapies have targeted – sickle cell disease, beta thalassemia, and LCA-10 – impact a much smaller population of patients.
So Verve’s upcoming clinical trial could be a gamechanger. If it’s successful, it will have positive ramifications across the entire genetic editing space, and result in a genetic therapy that can be delivered via an IV. One treatment and the patient is done.
That said, this isn’t a recommendation to invest in Verve Therapeutics (VERV). The clinical trial has just begun, and ideally, I’d like to see larger institutional capital start flooding back into the biotech market. We’ve seen some happening already in the last month; it’s a great start, but I’d like to see a lot more before the biotech boom gets back on track and returns to growth.
Editor, The Bleeding Edge