With startups going public much later, a vibrant market for secondary sales of stock in big private startups has sprouted. The market is vibrant — and hot. Research firm Nyppex says overall they’ve risen 54% just this past semester. (Bloomberg)This sounds pretty good, but we would add a few caveats:
- Private secondary stock needs a shut IPO window. The reason people are buying and selling stock in secondary markets is, almost tautologically, because they can’t do that on the primary market — the stock market.
- There are supply constraints. Because private company stock is much less liquid, and because many of these companies (Facebook, Groupon, Twitter) have so much hype, that creates supply constraints on private company stock, which possibly bids up prices. Facebook’s valuation in secondary shares is around $50 billion, but until very recently DST was investing at $9 billion.
- MOST IMPORTANTLY, there is selection bias. We shouldn’t infer something about the overall state of the startup industry from the stock prices of big startups, because by definition the only startups that grow so big are going to be the biggest, fastest growing ones. If you took a pool of the fastest-growing companies, then by definition those companies would grow very fast.
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