Despite a couple big-name companies like Groupon and Zynga lining up for IPOs, the demand for private company stock on alternative exchanges keeps rising. Private stock transactions on SecondMarket in the first three quarters of 2011 totaled $435 million, a 73 percent increase over the same period last year. In the third quarter alone, there were $167 million worth of transactions on SecondMarket, up 49 percent from the second quarter.
Who is buying all of these shares? SecondMarket breaks it out in its third quarter report. Wealthy “accredited individuals” made up the largest share of buyers (63 percent by dollar amount), followed by asset managers (22.3 percent of transactions), hedge funds (7.8 percent), and venture capital funds (5.1 percent). VC funds became much more active on SecondMarket in the quarter, accounting for 17.5 percent of the transactions by number. Last quarter, VCs made up less than 1 percent of transactions (and only 0.2 percent by dollar amount).
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On the seller’s side, former employees made up the bulk of completed transactions (64.5 percent). But current employees took the No.2 spot with 16.9 percent of transactions , nearly quadruple the 4.4 percent of transactions they represented in the second quarter. The number of transactions with investors selling doubled to 8.4 percent, signaling that secondary markets are becoming a more accepted liquidity valve for current employes and shareholders. Founders represented the smallest amount of transactions, at 3.6 percent, but that is up from 1.9 percent last quarter.
SecondMarket also tracks the “most watched” companies on its service, which is an indication of investor interest. The most watched companies didn’t change from last quarter: (Facebook, Twitter, Groupon, Zynga, Foursquare, Dropbox, etc.). But there is a new group of “rising stars.” These include Turntable, Jetsetter, and Klout. And then bubbling up just below the rising stars are the “newbies”: Pinterest, Billfloat, Firstwind, Proofpoint, and Zaarly. Hmm, is there a correlation between how much press a company gets and interest on SecondMarket?
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COMMENTARY: The virtually unregulated nature of secondary market brokers like SecondMarket and SharesPost should send out a red flag to any investor. The fact that the largest percentage of buyers of private company stock are now "accredited investors" puts an end to the claims by many VC pundits that there is no exposure to individuals. Bullshit. Private individuals now are clearly at risk. Since there are no published financial statements or disclosures by privately-owned startups like Facebook, Twitter and foursquare, to name a few, there is tremendous financial risk. Even startups like Zynga and Groupon, which have filed S-1's for an initial public offering, are showing disappointing revenues and earnings, or in the case of Groupon, no earnings whatsoever.
I can remember all the bullshit revenue and earnings estimates by so-called experts, and when the Zynga and Group filed for their IPO's, man was everybody disappointed. Can the something similar be possible for the likes of Facebook, Twitter and foursquare? The answer is a fucking huge YES, so watch out. There has already been a some softening in Facebook shares, and their ad revenue estimates were recently lowered by 6% by eMarketer. During the last SharesPost auction, buyers refused to pay the offering auction price, and so no shares were sold. In SecondMarket's last auction for Facebook buyers made the $32 per share price, but prior to this the price was hovering under $30.
Another interesting fact: 81% of sellers of private company stock are former employees or employees. What does this tell you? I think it's a red flag, that says, "I'm getting out while the getting out is good." Again, individual investors should be very wary, since they represent the largest percentage of the buyers of employee-owned private company stock.
I will bet you a sandwich and beer that those so-called "Rising Stars", are not making a dime in profit, perhaps with the exception of Kickstarter, but the others have nary a dime in revenues, and question remains: when will they start monetizing to justify their share prices (whatever they may be).
The "Newbies" are another pathetic lot of digital and green startups that probably have zero or little in revenues. That FirstWind has been planning an IPO since 2008, and cancelled. Now they are on the IPO trail again. FirstWind had total losses of $233 million and debt of nearly $600 million as of September 30, 2010. FirstWind is hoping for an initial offering price of $24 to $26 per share in an IPO. Good luck.
That startup BillFloat makes "little" pawnshop style loans of $200 or less at incredible interest rates. BillFloat is a recession business, one of thousands that have cropped up to meet the needs of consumers with financial problems and need a shortterm loan to pay basic living expenses. They charge a small fee of $4.99, provided you pay within a certain period of time. After this it gets really expensive. Oh, they were started begun by PayPal, so they were able to quickly attract VC money. Still, they are a slimeball business. Shame on PayPal. Zaarly is a mobile auction service. They claim they had 100,000 users and did $7 million in gross offerings. That's next to nothing in the auction business. They make a commission, so their actual take is very small. Their claim to fame: Meg Whitman is on their board of directors (not anymore, since she is now the CEO of HP). She did say that Zaarly was her favorite startup. I find that humorous, since that startup takes from the poor and gives to the rich. They did raise $15.1 million in VC money, but their business model is in constant state of flux. Their CEO said they were "trying different things to find out what works." Trion Worlds is a one product online MMO game site. They recently changed their revenue from subscription to free-to-play, so it begs the question, are they making any money? Probably zilcho. So watchout. They did raise something like $70 million in VC monies, but they are not Angry Birds by a longshot. Stay away from the Newbies is my advice. They all look like crummy startups to me.
If any investors or founders don't like what I said, you write to me anytime and set me straight.
Courtesy of an article dated October 26, 2011 appearing in TechCrunch
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