Noted venture capitalist Tim Draper is teaming up with investors to fund a private exchange for institutional investors to trade shares of start-up companies, calling it a “springboard” to an IPO.
Despite signs of life in the frozen public market, with Open Table making a robust public debut on Thursday, venture capitalists have struggled to take companies public as the recession killed investor appetite for new stocks.
Speaking at the Reuters Global Technology Summit in New York, Draper said the exchange would be a venue for entrepreneurs to raise dollars, while providing venture capitalists a way to recover their investments.
Called XChange (www.xchanged.com), the platform will launch in September, Draper said. It will invite qualified institutional buyers and high net-worth individuals — those with at least $100 million — to buy shares in start-ups.
Start-ups need to have at least $20 million in revenue to participate in XChange, and meet certain other criteria that Draper did not disclose but said were based on standards from other exchanges.
“We’re calling it ‘Taking it prublic,”‘ said Draper, whose firm has backed household names like Microsoft Corp-owned Hotmail, Yahoo Inc’s e-mail service Yahoomail and eBay Inc’s Skype.
“It’s an opportunity for an entrepreneur to get a little bit of liquidity and … for a venture capitalist to either show that these companies have some real value to them or to sell some.”
Venture capitalists invest in fledgling companies and hope to make a return several times that investment by taking the company public or selling it to a larger competitor.
There are 85 companies that have had to pull their initial public offerings because of inhospitable markets, Draper said. He said 200 start-up companies of the “highest quality” are ready to participate in the XChange.
XChange is not the first market dedicated to trading private companies’ stock, although it may be the first such effort backed by venture capital.
Nasdaq OMX Group Inc runs a portal for the private placement of stock. In 2007, Goldman Sachs Group Inc launched a similar platform, GS-TrUE, which later joined an alliance between Nasdaq and major investment banks.
TAKING IT “PRUBLIC”
About 250 companies went public in 2000, a number that plummeted when the dotcom bubble burst, before crawling back to a paltry 75 IPOs in 2007, according to the National Venture Capital Association.
The economic downturn made it even worse, with no U.S. venture capital-backed company going public for six months until April, when Bridgepoint Education Inc made its debut.
The IPO of restaurant reservation website Open Table, shares of which rose 59 per cent on their first trading day, may have gladdened the hearts of venture capitalists like Draper.
“It’s wide open right now because the buyers are very anxious for these IPOs,” he said.
But Draper complained about the high cost of maintaining a public market listing under Sarbanes-Oxley guidelines, which have made it increasingly unviable for venture capitalists to take their companies public.
“You have to be worth about $1 billion to go public in today’s market,” Draper said, pointing to Sarbanes-Oxley as a key barrier to the IPO of Glam Media, one of the most talked-about properties in his firm’s portfolio.
The online content and advertising network aimed at women does not want to spend the $5 million a year needed to be compliant with Sarbanes-Oxley, he said.
Draper Fisher Jurvetson has 20 to 30 start-ups that are ready for an IPO, Draper said, noting that any growing company with $30 million in revenue and $4 million in profit could be public.
He declined to comment on whether Glam Media would be open to an acquisition.
Venture capitalists have struggled to recoup their dollars by selling start-ups because potential buyers are unwilling to meet their price.