With the IPO market in the doldrums for some time, and merger activity still scarce, shareholders of venture-backed companies have had trouble getting liquidity for their stock. The dearth of exits has created a new opportunity for companies such as SharesPost, which launched in June 2009, and SecondMarket, both of which are trading platforms for buyers and sellers of private securities. It's an active sector. Recently, SecondMarket just acquired its competitor InsideVentures for an all-stock purchase.
In this week's Vator Box, Ezra Roizen (Vator Box regular and digital media investment banker) and I take a look at the prospects of SharesPost. Our guest host is Lorenzo Carver, whose expertise is in understanding valuations of startup companies through his company, Liquid Scenarios.
Here are some of our observations:
- Providing an online platform to trade shares of private securities is an open territory. Right now is the best time to launch such a platform.
- There will be challenges that all marketplaces face, such as getting a significant volume of both buyers and sellers.
- Most venture-backed private companies are highly opaque and pathologically secretive. There will likely be some heat from companies not wanting to have their shares traded in a secondary market as it would create confusion about the value of a company's shares. For instance, in August 2008, Facebook shares traded in the secondary market for between $4 billion and $5 billion. In 2007, Facebook was valued at $15 billion, after striking a deal with Microsoft.
- There may be challenges in protecting buyers of securities. Will buyers really know what the terms are around the securities they're buying?
- SharesPost may end up an investment bank. Wit Capital emerged in the mid-90s as a platform to provide liquidity for small, fairly unknown companies. Partly for regulatory and economic reasons, it turned into an investment bank.