Apparently there appears to be a growing sentiment among a select few within the startup community that the secondary sale of private company stock should be avoided like some bubble destined to pop. However, others such as Fred Wilson have been hopeful that a secondary market would step in to fill the gap left by a deteriorating IPO and M&A market.
Historically, companies have gone public for a few reasons, including liquidity, to raise capital, a currency and branding. Today, the secondary markets are proving that they can and are achieving this, although there are several obstacles that remain for the secondary market. In fact, of TechCrunch’s top 10 IPO candidates of 2010, only one (TSLA) has gone public, one has filed (Demand Media), and the rest have chosen the secondary markets. This post is intended to clarify the value of the secondary market for private company stock, and why the startup community should be in full support.
While Facebook is now trading at $50 billion in the secondary market, the real money would have been made on March 25th by reading the $50 billion valuation of Facebook released by SecondShares, when its was trading around $18 billion. SecondShares was scoffed at across the internet for contemplating in a public forum that Facebook had the $50 billion potential that we succinctly laid out. Other than the pride of saying that we at SecondShares “told you so”, more importantly is what this seminal piece of research was inferring.
History has demonstrated that the birth of many markets has been marked by a chorus of discrediting and undermining commentary by many including the entrenched players at risk. Clearly we are seeing these voices raised today in a choral synchronicity that may not merely be coincidence, but rather a modern day case of markets evolving away from their best interests.
To keep this short, and actually not all that sweet, we are all aware of the public market’s decade long bear market burn of value in the US public equity market. Necessity being the mum we all love and appreciate is providing for a new way to channel value creation. A chart of the S&P over the last decade demonstrates that the US public equity market has been sorely lacking.
Given the precarious state of the world’s public equity markets that we can read about daily in the financial press of your choice, it is quite concerning to me that so many within the startup community are seeking to cast dispersion on a market that is so strategically critical in today’s financial environment and possibly for many years to come.
Importantly, we believe there is a critical strategic imperative being recognised by those leading both dominant and emerging private companies to not relegate the mechanism by which their company’s equity gets valued to the whim of a public equity bear market. The use of private company stock to attract and retain key employees through stock options as well as the use of a stock based currency to acquire strategically critical assets is mission critical and best not left to chance valuation in a bear market. I’d like to publicly recognise that trust is shifting to an orderly, governmentally blessed and legitimate second market. This shift is happening now in a size and scale that is dramatizing this shift. Facebook’s $50 billion dollar equity valuation is merely a well articulated metaphor that highlights this metamorphosis.
We doubt that companies with values in the billions of dollars simply forgot or can’t figure out how to file a document with the SEC to go public. Ask any of the countless investment bankers chasing Facebook and the many other companies that would be gladly be shown the rubber chicken laced road shows employed to go public. These companies are clearly choosing not to go public. Is there a lesson in this for many that think that the road of running a successful company must go through the IPO door? Might Morgan Stanley’s star internet analyst, Mary Meeker, have her final call be one of her most telling as she walks away from her legendary post on Wall Street to enter Silicon Valley’s noted venture capital firm Kleiner Perkins?
To be sure, this market will likely see its crappy deals and inevitable ripoff artists. However, we have seen this dynamic not only relegated to emerging marketplaces. As we consider recent events in the public equity markets such as the recently announced largest ever insider trading scandal, Bernie Madoff’s escapades, pink sheet shell company shenanigans as well as countless public stock manipulations we can see that we that despite best efforts and in fact, improving efforts that such activities are very unfortunately a part of the entire investment landscape. Importantly, when criminal activity is perpetrated, it is worthy to note that insult is added to injury in the public market’s crimes as it can count as its victims those that are not even accredited investors; unlike the case of the transactions involving the shares of privately traded companies in the second market.
In the end, as we all know, the world is getting flatter there is more business intelligence more firmly planted more broadly than it ever was before and this is enabling the realities of why the second market has the credibility and traction that it does. SecondShares helps to provide a professional and reasoned voice of commentary and analysis in a market that is destined to grow in its size and consequence.
The punch line is that despite the talking head du jour you may see or read that claims to be able to divine the future, nobody really knows when our US equity market bear will go into hibernation. The headlines of large scale criminal trading investigations, massive sovereign fiscal and political disconnects and ever present fears that our bear may ultimately grow to resemble Japan’s 20 year plus bear market must reasonably be expected to impact the way business is conducted and transacted.
The strategic imperative of thoughtfully considering the venue in which a Board and a management team chooses to have their company valued may in fact best be left to a market that they can believe in and understand; rather than a public equity market with valuation dynamics so complicated that nobody can seemingly get a handle on it.
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