At our upcoming Venture Shift conference in NY, we will discuss the impact of secondary markets on venture finance. We ran a similar panel this summer at our SF event to a lot of interest.
There is a tremendous promise to SharePost and SecondMarket and other secondary sales exchanges. They already are providing liquidity to investors and employees in an asset class (VC) where liquidity has been long in coming. They may be setting prices for upcoming IPOs – the Groupon IPO priced initially very close to recent SecondMarket trades. This ameliorates one of the conundrums of hot IPOs – when they pop in the after-make, the company feels like they left too much money on the table.
The much bigger opportunity is to replace a huge void in the venture ecosystem – the small IPO.
The venture industry grew with small IPOs. Looking back at venture history, it is remarkable how small some of the signature IPOs were. The ’80s and ’90s were driven by small IPOs, led by the “four horsemen” investment banks: Alex.Brown Inc., Hambrecht & Quist Group, Robertson Stephens & Co., and Montgomery Securities, now lost in history. (Also lost in the cited WSJ article on the horsemen is that initially L. F. Rothschild was the fourth horse; Montgomery came up strong on the inside in the late ’90s.)
The unfortunate result is not just that the venture industry has had delayed liquidity, but the small investor has been shut out. In an effort to protect the retail investor, new rules like Sarbanes-Oxley have pushed them out entirely. As you can see in this chart, which is from a great report on the state of venture capital by Bill Quigley of Clearstone, by the time the high-fliers go public today, most of the value has been accreted by insiders. Put simply, would you rather have bought Amazon at $440M market cap, later capturing its 100x rise; or Groupon at around $20B, where its potential may be slight if not negative (if you buy into Henry Blodgett’s rants)?
The real promise of secondary markets is to begin selling primary shares – a private alternative to the small IPO. The target companies would be expected to a do a public IPO afterwards, which generates interest in trading the stock after the private small IPO. This opens up the opportunity for outsized gains to accredited investors, a much broader audience than VC insiders. It doesn’t yet get to the retail investor, but it gets us a long ways forward.
It also positions the secondary trading exchanges brilliantly to evolve in to the new horsemen, this time in more of an online manner, a step forward in transactional efficiency and openness.
We still need the small IPO back. I wrote about a great series of reports by David Weild of Grant Thornton in a post on Why IPOs are in the Dumpster in my prior tech blog. He has been in the WSJ, including a recent editorial. Here is his final report:
Duncan, where did you get the slide that you referenced in the article ‘the promise of secondary markets”? It looks like the same slide from a deck I authored at Clearstone. Happy for you to use the slide, but please reference the source as William Quigly, Clearstone Venture Partners.
Thank you.
From you of course. Had referred to it in the link in the text, which goes to an earlier post that extolls the virtues of your analysis. I have updated this post to also make the reference clear. It was a great report and I hope everyone who reads this will go take a look.
[...] happened two years ago at a much lower value. I have commented on how post-bubble regulations have crushed the small IPO market, the prior lifeblood of tech financings. Simply put, the retail invester used to be able to share [...]
[...] are excluded from the significant appreciation. (Duncan Davidson of Bullpen Capital has a great post on this trend, using data from William Quigley of Clearstone Venture [...]
[...] are excluded from the significant appreciation. (Duncan Davidson of Bullpen Capital has a great post on this trend, using data from William Quigley of Clearstone Venture [...]