According to Peter Barris, managing general partner of New Enterprise Associates, a venture capital firm, secondary markets for shares in private companies are a “sideshow”. At the Dow Jones Private Equity Analyst Conference, he made it clear that venues such as SecondMarket and SharesPost are not where the real trading action is.
But, it is where you’ll find the handful of companies that interest you most.
Barris notes, “Places like SecondMarket are trading about 50 different names,” adding, “half of the volume is one name – Facebook. Toss in Twitter and Zynga, and you have the lion’s share of the volume.”
Don’t take this perspective as pessimism. The Wall Street Journal reports that Baris would “love to see the secondary markets become more widespread in terms of their adoption.” It’s easy to see why: these venues provide early exits for investors (including the venture capital community) and employees who have been waiting patiently for a while to cash out. As companies take longer to go public, especially relative to the mania of the late 1990s, trading in these environments can alleviate some pressure that could lead to talent implications.
And Barris puts his money where his mouth is.
His fund sold shares in Groupon in the secondary markets, pulling in $70 million “on top of a $14.8 million investment.” The fund still has a 14.9 percent stake in the daily deals site. He explains his reasoning:
“One of the problems with any offering is the overhang of venture capital ownership,” he said. “If you start metering that out at that point in time by taking 5% to 10% of your interest off the table — if the entrepreneurs take a little of their interest off the table so that there’s still plenty there to incent them–you could argue that actually lets you run the table,” said Barris, who led the firm’s first $4.8 million investment in Groupon back in January 2008 when it was called ThePoint.
What’s really interesting, however, is that the secondary markets themselves are living this way. This week, SecondMarket, which is also backed by New Enterprise Associates, announced it would let its employees sell as much as $13 million in SecondMarket stock via its own platform (at a valuation of $160 million).
This doesn’t mean that everyone’s on board, though. Bob Ackerman, of Allegis Capital, believes that these transactions don’t offer enough transparency. Eventually, he says to the Wall Street Journal, somebody’s going to get sued.”
He’s not the only one who isn’t crazy about the selling of pre-IPO shares on these private exchanges. Some companies are making moves to prevent such sales in their agreements with venture capital firms. One of the reasons for this is to limit the number of investors in a company. As Facebook has shown us, the world gets a lot more complex when you hit 500 – and face a number of SEC requirements.