SecondMarket's Barry Silbert on the death of the IPO

Silbert asks the big question of the day: Why bother going public at all?

Barry Silbert, CEO of SecondMarket, took the stage at Venture Shift and kicked things off with a trip down memory lane.

“Anyone hear of the flash crash on Wall Street?” he asked. “P&G and their companies were dropping at a precipitous rate.  It happened over the course of five minutes.”

Why?  The machine broke down.  What caused the “flash crash”?  High-frequency trading.  Computers are making investing decisions.  In 1970, the average time someone held their stock was five years.  Today, it’s less than three months. 

Silbert then showed three stocks that plunged due to disappointing quarterly earnings reports.  Green Mountain Coffee dropped 17% after missing their earnings predictions by one penny.  Netflix and Amazon also saw steep plunges over the summer.

The number of IPOs have been in a steady decline for the last several years.

What happened?

Silbert says it started in 1996 with the shift to online brokerages.  In 2001 it was decimalization—researchers couldn’t make money anymore on writing research.  In 2002, it was Sarbanes-Oxley.  And in 2003, following the Enron scandal, it was the research settlement.

The result: thousands of “zombie” public companies.

It now takes on average 10 years to take your company public. 

“Angie’s List went public today, and it was 16 years old.  Can you imagine waiting 16 years to get value out of your company?  I call that a broken system,” said Silbert.  “There’s this big gap that’s been created that has to be filled.”

Because 90% of companies stay private, “we need to find another way to access capital,” said Silbert.

SecondMarket got its start when a Facebook employee called them up and asked for help to find a buyer for some options.  Things took off from there and now several high-profile companies have shares on SecondMarket.

Earlier this month, SecondMarket raised $15 million for a $200 million valuation after raising $13 million in September by tapping into its own marketplace.

Silbert then turned to a picture of the cast of the Jersey Shore ringing the bell on the market floor with a quote: “Signs of the apocalypse?”

“The real innovation here is that we’re putting the market model in your hands—the entrepreneur’s hands.  Instead of making you conform to a public market, we enable you to customize your own market.  Companies don’t want this flash crash bullshit.  Here, they get to decide who gets to trade, who gets in.  For some companies, it’s a negotiated price, for other companies we run a weekly auction.

“Historically speaking, when a company went public it was like switching on a lightswitch, but that doesn’t work anymore.  Now you have to create a dial.  You have to slowly, over time, turn that dial.  In year one, you only allow certain people to buy your stock.  In year two, you open it up to more people.  In year three, maybe you do an auction.”

The private market is taking the place of small-cap IPOs, Silbert said.  “More companies decide to stay private on their own terms.  And in the future, there’s not going to be a concept of public versus private.  Companies are going to just choose different ways to sell their options.”

Someone from the audience asked Silbert about the role research is going to play on SecondMarket, to which Silbert replied:

“Research is going to be critical for the long term.  There’s pull-stocks—Facebook, Zynga, those guys.  And then there are push stocks—everyone else.  You need research and awareness.  Our approach is going to be, SecondMarket is going to pay for it.  We’re going to take some of the transaction fees to pay for research.”