If you thought one sector was free from disruption by the internet, it has to be the exclusive, high-touch world of corporate M&A advisory. Think again. A new breed of companies, called “private market networks”, are bringing middle-market corporate finance online.
And it makes sense. As Peter Lehrman, co-founder & CEO of AxialMarket, one of the leaders in the space, notes, the internet has gone from disrupting small, simple transactions (think eBay and Amazon) to the more complex (e.g. travel) to even bigger and more complex (e.g. real estate and eBay Motors). So M&A is a logical next step. Lehrman points out that the art market is also coming online with companies like Art.sy and says, “Big, opaque large-dollar markets have been handled offline, but the internet is coming.”
The market opportunity is huge. Eric Jackson, co-founder & CEO of CapLinked, another private market network, says there is $600 billion invested into private companies worldwide by individuals, and $1 trillion if you include institutional investors. 10 to 20 million people in the US are accredited/institutional investors or other investing professionals, company owners and managers; there are 6 million private companies and a third of them have outside investment. There is also the universe of advisers: lawyers, broker-dealers, CPAs…
Let’s see how these Private Market Networks work.
How It Works: From Craigslist To LinkedIn
As Dow Jones notes (PDF), Craigslist-type bulletin boards to sell companies such as BizQuest and BizBuySell have been around since the beginnings of the internet. But these services tend to be feature-poor and as a result tend to focus with small businesses under $1 million EBITDA.
Bigger companies need a more sophisticated set of features to work, like secure online data rooms and the capacity to make people sign online NDAs to start the due diligence process.
Eric Jackson describes CapLinked as “LinkedIn-meets-Salesforce for private investing.” These services take pages from these “web 2.0” services: the networking features of a professional social network to find new leads and opportunities, and the lead-tracking features of a CRM system.
Here’s how it works: let’s say you want to sell your company, or are advising someone who does. You log into the service and create a teaser page that describes your company–sector, financial information and the like. You can find buyers on the site who are likely to be interested. If they are, they can sign the NDA you’ve uploaded and perform some due diligence.
So these platforms work as both networking tools and marketplaces.
This video from AxialMarket gives an idea of what these networks are like:
MergerID, which is backed by Pearson, the British media and education conglomerate that owns the Financial Times and half of The Economist, takes a more market-like approach.
Some players are more focused on the tech space, where private investment activity is vigorous and where people are open to new tools. Gust describes itself as a tool for startups to apply to angel groups and venture capitalists: they upload their business plan and apply through the site. AngelList describes itself as “Match.com for startups and investors” and has had great success facilitating private investment but for a very specific type of investment in specific companies. (Click here for our interview with AngelList co-founder Naval Ravikant.)
In other words, there is vigorous competition in the sector, which shows things are headed in the right direction.
THE BOTTOM LINE
- It’s important to point out that private market networks won’t replace M&A advisors and other professionals, just as real estate search engines haven’t replaced real estate brokers. For these types of transactions, you need a high degree of trust and high-touch contact.
- That being said, we think private market networks will bring increased transparency and efficiency to corporate finance. For a lot of medium-sized businesses that aren’t based in metropolitan hubs and aren’t in well-covered industries, it is hard to find buyers or partners. These networks will make the market work much better.
- For that reason, we think private market networks are a large opportunity, and that one or more players will reach nine-figure dollar revenues within 10 years.
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