Two years ago, former employees of Facebook Inc. approached SecondMarket about whether they could unload their stock on the alternative-investment marketplace.
At the time, SecondMarket’s trading platform allowed for the trading of illiquid assets like auction-rate securities but not private-company stock, so it politely declined. “But after we saw Microsoft invest in Facebook at a $15 billion valuation, we began looking into it more,” said Jeff Thomas, vice president of SecondMarket’s private company market, onstage at VentureWire’s FASTech conference.
SecondMarket now runs a robust private-company market, enabling more than 200 private-stock transactions worth about $359 million since launching the platform in early 2009.
Facebook, meanwhile, now accounts for 40% of the trading volume on SecondMarket, so it has begun closely monitoring and controlling the sale of its stock. Like most other companies whose shares trade on SecondMarket - there are roughly 40 of them, Thomas said - Facebook has first-refusal rights on any stock sold, and it charges a $2,500 fee to sellers. It also recently updated its corporate bylaws to account for the secondary market.
A big concern for Facebook and other hot private companies is a Securities and Exchange Commission rule that requires private companies with 500 or more shareholders to file for an initial public offering or seek an exemption. That’s encouraged these companies to seek ways to shore up their capitalization table.
“A lot of the companies we talk to say, ‘We’re starting to approach this limit of a very fragmented cap table, so we need to run a process to clean that up,’” Thomas said. “We just completed our first transaction for a company that made a number of acquisitions where their shareholder count ballooned, so we went out and reduced their shareholder count by about 20%.”
In an off-stage interview, Thomas declined to name the company but said it agreed to wave its first-refusal rights so that SecondMarket could select institutional investors that could purchase a large amount of stock and in turn consolidate the number of shareholders.
Besides triggering an IPO filing, there’s another concern for companies whose stock is in high demand on the secondary market. Potential acquirers don’t generally like to deal with companies that have messy shareholder structures, especially when the goals of investors and management aren’t aligned.
“When considering acquisitions, it wouldn’t be surprising for anyone to hear that we look for ‘clean’ companies,” said another FASTech panelist, Charlie Rice, the vice president of corporate development and strategy at Symantec.
“In this context,” Rice said, “that would be exhibited by a straightforward balance sheet or a simpler capitalization structure. We would be wary [of] complexities in capitalization that could hinder or slow a deal that we’ve worked very hard to get.”
An emerging group of private-company investment funds may help, as we’ve chronicled here and here. These funds, which seek to buy stock in hot private companies from former employees and angel investors, aggregate the buyers into a single-purpose limited liability company, counting as just one shareholder.
COMMENTARY: Very interesting company, but their fee of $2,500 is steep, so you have to own a fairly substantial number of shares that qualify for trading on SecondMarket.
On October 12, CNBC reported that SecondMarket released its third quarter numbers and the platform for trading private company shares is on a tear. It completed nearly $75 million in transactions, bringing its total deals this year to $250 million. That translates to major growth: it's 2.5 times the deal value in all of 2009 and five times the number of transactions. Here's how you can trade your private shares on this platform. But even if you don't want to buy, or don't qualify, SecondMarket's trading data indicates where savvy accredited investors see opportunity in this fast-growing alternative market.
Facebook is consistently the most popular investment — it accounted for 37 percent of trades last quarter. That's even more impressive considering that shares are priced base on a whopping $33 billion investment.
There's no question, investors are obsessed with social media — it dominates investor demand. Facebook is consistently the company investors are most eager to invest in, with 34 percent of buy-side interest. It's followed by Twitter (5.8 percent), LinkedIn (5.7 percent) and Zynga (3.9 percent).
This rush to invest in social media makes sense: LinkedIn is valued at around $2 billion. Twitter's value is also around $2 billion, even though it's just starting to generate revenue. And Zynga has a whopping $5 billion valuation on nearly a billion dollars in revenue. There just aren't any public companies that offer a pure-play opportunity to invest in social media. As Rob Armstrong, senior Columnist for Dow Jones Investment Banker pointed out to me: it's hard to come by tech companies with really strong top line growth in the public markets.
So what's the next Facebook? SecondMarket's report of surging investor demand shines a spotlight on a few companies. Groupon saw the biggest leap in demand this past quarter — a 63 percent jump — as the group buying company grows users and draws media attention. The company will generate an estimated $500 million in revenue this year.
Investor interest in Zipcar jumped 47 percent: the company filed its S-1 in the past quarter and is expected to go public this fall. Other companies drawing growing interest: real estate website Trulia (up 30 percent in the quarter), revolutionary music service Pandora (up 29 percent), and green tech companyBloom Energy (up 29 percent).
And this quarter investors had three new companies on their radar -- for the first time investors asked SecondMarket for a chance to buy shares of Angie's list, which sells a subscription to consumer reviews, online video platform Brightcove, and web content company Mahalo.
There were some very unexpected names on SecondMarket's most-traded list-- they have nothing to to with social media. Check out my next blog for the details.
SecondMarket differentiates itself from other illiquid asset traders by trading in shares of only high visibility startups companies (see above) who have been in business at least four years and have developed considerable and discernible business value. Sellers include employees, angels and VC firms looking for liquidity.
SecondMarket's direct competitor's in the illiquid asset trading platform space includes SharesPost, a company I often recommend to shareholders of private companies, Grant and Thornton, IlliquidX, BNY Mellon. SecondMarket also competes with thousands of wealth or asset management firms, hedge fund management firms and stock brokerage firms specializing in private placements and trading of illiquid assets.
On February 23, 2010, SecondMarket successfully raised $15 million in venture capital from two Asian investors: The Hong Kong-based Li Ka-shing Foundation and Singapore-based Temasek Holdings (through its Dunearn Investments subsidiary) which invested $7.5 million each. The capital will be used to expand into the Asian markets, hire staffers and improve its trading infrastructure.
Courtesy of an article dated November 4, 2010 appearing in The Wall Street Journal's Venture Capital Dispatch and an article dated October 12, 2010 appearing in CNBC's Media Money
Comments