Private company secondary markets

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Private company secondary markets

  1. 1. Private Company Secondary Markets Facebook and Twitter are just the beginning @cardinalrose
  2. 2. Table of Contents Market Overview Deal Mechanics Completing a Transaction Appendix
  3. 3. Private Company Secondary Markets Private company secondary markets willsolve the liquidity problems for employeesand board members while also providinginexpensive access to growth capital
  4. 4. Private Company Secondary Markets “Late stage venture funds are like thesmall cap funds of the ‘90s and the early2000s.” Lawrence Lenihan, Jr, FirstMark Capital, April 2011
  5. 5. My Prediction Secondary markets institutionalize changing the industry: • Many more companies adopt secondary marketplace platforms • SEC introduces regulation that strengthens the market • Late stage market expands and IPOs get pushed out further • Stronger companies emerge as a result of longer gestation period • Secondary marketplaces experience rapid growth replacing antiquated systems The lines blur between late stage venture funds and hedge funds • Late stage funds reduce lockups from 10 years to 2 years to adjust for liquidity • Hedge funds allocate 10-30% to less liquid secondary markets •Balanced with market neutral public markets • Massive amounts of capital flow into this new asset class
  6. 6. The IPO – Pros & Cons Pros: • Gain liquidity for shareholders • Gain access to growth capital Cons: • Sarbanes Oxley • Headaches, regulation & compliance • Additional legal risks • Wall Street disconnect • Short term trader mentality • Algorithmic trading disconnected from fundamentals • Loss of cache
  7. 7. The Public Markets – Drivers of Change: • Sarbanes Oxley • Decimalization • Separation of investment banking and research • Consolidation of boutique banks • Longer pre-IPO gestation periods
  8. 8. Current Late Stage Market Overview:• There is ~$21b invested in late stage deals per year• Traditionally 30-50 funds participate in this market• Companies require inexpensive access to growthcapital• Companies require less board seat and operationaladvice
  9. 9. Ideal Private Secondary Market Company:• $100-$500m in market cap • Too small to go public• $20m in revenues • Tech and Clean Tech sectors• Approximately 5 years old• Don’t have to be profitable• Venture backed• Over 100 shareholders
  10. 10. Testimonials: “These companies I’m buying on the private market are at the same stage as when I used to buy them when they went public. So why not buy them?” Business Insider, January 2011 “We now believe Facebook could be worth more than $200b in 2015” Wedbush, March 2011
  11. 11. The 4 Horsemen:Company Date Funding Last Round Val Recent Rumored Val Revs 2011E P/SFacebook Jan-11 $1.5b $50b $75b $4b 19xGroupon Jan-11 $950m $4.8b $15b $2b 8x Zynga Jun-10 $300m $4.5b $10b $2b 5x Twitter Dec-10 $200m $3.7b $7b $140m 50xSource: Company reports and Business Insider
  12. 12. Is There A Tech Bubble? Large Cap Blue chip techs are cheap Mid Cap Expansion stage growth, similar to late stage Small Cap Completely ignored, no liquidity, getting worse Late Stage A handful are valuations are extreme, similar to mid caps Mid Stage Total VC AUM shrinkage decreases demand Early Stage Companies seeking $3m+ getting decent valuation Seed Stage Valuations have crept up from $2-3m to $3-4m pre
  13. 13. Changing VC Perceptions Old: • No one exits before we exit • A future exit keeps the employees motivated New: • Employee liquidity helps retention & recruitment • Secondary sales are a 3rd exit avenue after IPOs & M&A • Can manage portfolio more efficiently
  14. 14. Private Markets are Institutionalizing: 2010: 90% of transactions were over-the-counter 2011: ~80% will be listed market transactions • SecondMarket & Xpert Financial will be 100% listed • SharesPost is registering as a broker-dealer • Primary markets will be established
  15. 15. What is a “Listed” Private Market? • Company and board approved • Controlled sales • Limited Selling Windows • Market Creation • Right of First Refusal
  16. 16. Comparison:SecondMarket SharesPost Xpert Financial• Launched April 2009 • Online Bulletin Board • 2 Years Old• Broker-Dealer • 3rd Party Research • Broker-Dealer & SEC Reg ATS• Over $500m transacted • Registered Specialists • Tim Draper- Chairman• Diverse Alt Assets • 60,000 Members • Licensed Nov 2010• 28 Reported Companies • 16,000 Accredited • Electronic Platforms• 2010: OTC • Min Transaction: $25k • Full Level II Quotes• 2011: Listed • Standardized Contracts • 8-9 Cos in Pipeline• VC: FirstMark • Heavy Technology • RegD Rule 506 –Primary Share • Pursuing BD License Sale License • 2-5% fee both sides • Rule 144A – Qualified Institutional Buyers • Rule 144 – Accredited investors - non-Affiliated sellers - pending • Reverse Inquiry Basis • Company approval
  17. 17. Notable Secondary Transactions: Kleiner Perkins $38m in Facebook at $52b, Feb 2011 Andreesen Horowitz $80m in Twitter, Feb 2011 DST indirect secondary participant: Facebook, Zynga, Groupon Accel sold $516m Facebook to TCV (~$200m), Andreesen Horowitz (~$80) and others at $35b, Nov 2010 Chris Sacca $400m in Twitter at $4.5b from Spark, Union Square, and Ev Williams, Feb 2011
  18. 18. Deal Mechanics
  19. 19. 3 Parties in a Secondary Transaction: • Buyer • Seller • Company - Right of First Refusal - Co-Sale Rights
  20. 20. Types of Buyers: • Existing VC Investors • VC Funds that lost primary round • Fund-less Sponsors/Special Purpose Vehicles • Participants in Secondary Markets • Endowments, Pension Funds, HNW, Sovereign Wealth, Insurance, Private Equity • Direct Secondary Funds • Late Stage Venture Funds • Mutual Funds & Hedge Funds - Public Market Investors
  21. 21. Types of Sellers: 100% 90% 80% 70% 60% 1Q10 50% 2Q10 40% 3Q10 30% 4Q10 20% 10% 0% Ex-Employees Employees Investors/Other Source: SecondMarket
  22. 22. Types of Secondary Sales: • Sr. Preferred – indirect for Common Shares • Jr. Preferred – indirect for Common Shares • Outright purchase of Common or Preferred • Upside Sharing – buyer splits proceeds of future sale • Escrowed Shares – earn-out incentive • Loan for Shares – avoids ROFR, Co-Sale & Taxes • Loan to Exercise Options
  23. 23. Types of Transactions: • Modified Dutch Auction •Minimum bid, clearing price => lowest bid that clears • Fixed Price Auction •Set price, all bids above minimum • Bulletin Board •Bidders are matched to sellers online
  24. 24. Considerations: Transfer Restrictions • Right of First Refusal (ROFR) • Co-Sale • Upfront waiver rights can be granted Workarounds • Loan for Shares avoids ROFR and Co-Sale • Earn-outs deter Co-Sales Contractual Rights • Registration rights and preemptive rights are transferrable • Require separate transfer agreement with the company
  25. 25. Risks:
  26. 26. Two Primary SEC Regulatory Risks: Special Purpose Vehicles designed to bypass the 500 investor rule • Goldman Sachs’ US Facebook SPV was canceled • Could give rise to parallel market of SPV • Small SPVs charging 8% fees & 20% carried interest •Shares post has completed 5 SPV auctions •3% commission, 5% management fee, 3% distribution fee •Cannot exit until IPO when Units convert to FB shares Lack of Share Count, Cap Table, and Company Financials • Even “sophisticated” investors need financials • Significant amount of 3rd party data but little company data • Listed markets resolve this issue
  27. 27. Additional Risks: • Illiquidity • Opacity • Information Asymmetry • Valuation • Behavior of secondary investors • Shift from options to RSUs
  28. 28. Future Listed Markets: Companies will waive ROFR in exchange for: • Employees sell no more than 10-15% of vested/owned positions • Only employees with 4+ years can participate Board approved potential investor list • Investors adhere to the board’s guidelines • Investor group receives audited financials • Company has recourse if guidelines are violated
  29. 29. Completing the Transaction
  30. 30. Private Company Secondary Markets:
  31. 31. SharesPost example:
  32. 32. Current Active Trades on SharesPost:
  33. 33. SharesPost Order Entry:
  34. 34. SharesPost Order Confirmation:
  35. 35. SharesPost Bid/Ask Page:
  36. 36. Yelp! Company Registration:
  37. 37. NeXt Up Research: Yelp! Key Metrics:
  38. 38. NeXt Up Research: Yelp! Valuation:
  39. 39. NeXt Up Research: Yelp! Lead Investors:
  40. 40. Appendix
  41. 41. Companies Traded on SecondMarket:
  42. 42. Facebook Price Chart:$50.00 1/13/2011 $33.00 4/1/2011 $70.00$46.00 1/12/2011 $33.00 4/1/2011$45.00 1/12/2011 $35.00 3/29/2011$50.00 1/11/2011 $35.00 3/17/2011 $60.00$55.00 1/11/2011 $33.00 3/11/2011$50.00 1/11/2011 3/11/2011 $33.00$55.00 1/11/2011 2/18/2011 $37.00$35.00 1/10/2011 $50.00 $30.00 2/14/2011$40.00 1/7/2011 $31.00 2/11/2011$55.00 1/6/2011 $31.00 2/7/2011$25.00 11/30/2010 $32.50 2/3/2011 $40.00$25.00 11/24/2010 $35.00 2/2/2011$20.00 11/22/2010 $35.00 2/2/2011$15.20 11/9/2010 $35.00 1/26/2011 $30.00$20.00 11/4/2010 $35.00 1/19/2011$15.20 11/2/2010 $60.00 1/19/2011$25.00 10/19/2010 $51.00 1/19/2011$14.40 8/31/2010 $20.00 $40.00 1/19/2011$15.00 8/31/2010 $27.60 1/19/2011$15.00 8/30/2010 8/10/2010 $60.00 1/18/2011$15.00 $10.00 8/5/2010 $40.00 1/18/2011$15.20 7/27/2010 $45.00 1/18/2011$12.00 6/25/2010 $50.00 1/17/2011$14.00 6/24/2010 $45.00 1/16/2011 $0.00$13.50$12.60 6/21/2010 $50.00 1/15/2011$10.00 4/26/2010 $45.00 1/14/2011 $5.40 12/4/2009 $48.00 1/14/2011 $2.40 $66.00 1/13/2011 SharesPost
  43. 43. 3rd Party Research: • Wedbush Securities • NextUp Research • Liquid Scenarios • Arcstone Partners • VC Experts • CB Insights • Research 2.0 • Greencrest Capital • Blueshift Research • PrivCo • GigaOm • Majestic/ITG • Crystal Research Associates
  44. 44. Largest VC Backed Deals in 2010: 1 Better Place Clean Tech Expansion $350,000,300 2 Twitter Internet Expansion $200,000,000 3 BrightSource Energy Clean Tech Later Stage $150,000,000 4 Abound Solar Clean Tech Expansion $111,000,000 5 Trilliant Telecommunications Later Stage $105,999,800 6 Elevance Renewable Sciences Clean Tech Expansion $100,000,000 7 HighTower Holdings Financial Services Expansion $99,999,900 8 Casa Systems Internet Infrastructure Later Stage $96,460,000 9 Pierpont Securities Financial Services Expansion $84,999,900 10 Fisker Automotive Clean Tech Later Stage $78,078,900
  45. 45. IPO Pipeline: Date Name Ticker Description IPO size 2010 Revs 7/14/2010 AMC Entertainment AMC Movie Theaters $450m $2417m 3/11/2011 HomeAway AWAY Online Real Estate Rentals $230m $168m 3/15/2011 Qihoo 360 QIHO Chinese Online Security $200m $58m 2/27/2011 LinkedIn Business Social Network $175m $161m 9 months 9/29/2009 NewEgg.com EGGZ Electronic Ecommerce $175m $2100m 2008 2/28/2011 Skullcandy SKUL Electronic Accessories $125m $140m estimated 11/9/2010 Tudou TUDO Chinese Online Video $120m $34m 9 months 2/11/2011 Pandora Online Music $100m $55m FYJan11 8/9/2010 Skype Online Telephony $100m $406m 6 months12/23/2010 Responsys MKTG Email Marketing $60m $85m11/17/2010 Kayak KYAK Online Travel $50m $128m 9 months 2/10/2010 Gamefly GFLY Online Video Game Rentals $50m $98m FYMar10
  46. 46. Relevant 2010 IPOs: Name Ticker Performance Epocrates EPOC 44% Demand Media DMD 24% Neilson Holdings NLSN 17% Sky-Mobi YSM -33% Dangdang DANG 69% Youku.com YOKU 174% Bitauto BITA -26% Mecox Lane MCOX -33% MakeMyTrip MMYT 86% GreenDot GDOT 20% RealID RLD 49% Tesla TSLA 31% Vringo VRNG -41% Motricity MOTR 55% ReachLocal RLOC 59% TeleNav TNAV 39% Convio CNVO 32% Quinstreet QNST 51% Average 34%
  47. 47. VC Market in Graphs
  48. 48. The VC industry has lagged the major benchmarks over the past 10 years: 10 years Dow Jones 2.50% S&P 500 -0.40% Nasdaq -4.30% US Venture Capital Index -4.60% Cambridge Associates, Sept 2010
  49. 49. Due to “J-Curve” older funds should have higher TVPI but they don’t: Total Value to Paid in Capital (TVPI) 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Cambridge Associates, Sept 2010
  50. 50. As a result VC assets under management are falling: Assets Under Management $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NVCA, Jan 2011
  51. 51. And the total # of VC funds are falling: Total # of VC Funds 2000 1800 1600 1400 1200 1000 800 600 400 200 0 NVCA, Jan 2011
  52. 52. But the total # of investments is steady: Number of venture investments 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NVCA, Jan 2011
  53. 53. And the total amount invested is steady: Total Amount Invested $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NVCA, Jan 2011
  54. 54. There have been so many deals but so few exits: Exits as a % of Total Deals 16% 14% 12% 10% 8% 6% 4% 2% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NVCA, Jan 2011
  55. 55. IPOs have dried up: IPO exits 300 250 200 150 100 50 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NVCA, Jan 2011
  56. 56. The median age at IPO has risen from 6 to 10 years: Median Age at IPO 12 10 8 6 4 2 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NVCA, Jan 2011
  57. 57. Private Secondary Markets are a new exit option: Transaction $ Amount $180,000,000 $160,000,000 $140,000,000 $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $0 1Q10 2Q10 3Q10 4Q10 SecondMarket, Feb 2011
  58. 58. What happens next? Secondary markets institutionalize changing the industry: • Many more companies adopt policies and platforms • SEC introduces regulation that enhances the market • IPOs get pushed out further and bypassed entirely in some instance • Stronger companies emerge as a result of longer gestation period The lines blur between late stage venture funds and hedge funds • Late stage funds reduce lockups from 10 years to 2 years to adjust for liquidity • Hedge funds allocate 20%-40% to less liquid secondary markets •Balanced with market neutral public markets • Massive amounts of capital flow into this new asset class
  59. 59. Thank YouJason M. Jonesjjones@highstepcap.com914-315-9751Follow me on Twitter: @cardinalroseProfile on Google: /profiles.google.com/jjones1/

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