Private company secondary markets january 2012 - markum breakfast

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  • 1. Private Company Secondary Markets January 2012
  • 2. Private Markets are Getting an Overhaul Super Angels VC Crowdsourcing Accelerators Private market fundsCopyright 2011 HighStep Capital. All rights reserved.
  • 3. Market Size2004: Facebook was founded2006: 1st Facebook secondary transaction2008: SecondMarket completes their 1st Facebook transaction2010: SecondMarket completes $400m in secondary transactions2011: Private secondary market completes ~$5b in transactionsCopyright 2011 HighStep Capital. All rights reserved.
  • 4. Financing Structures Primary Secondary BuybackCompany issues “alphabet” Investors purchase existing Company uses excess round preferred shares to shares from individuals, cash to repurchase stockinvestors who sign various small groups or institutional from certain shareholders shareholder agreements investors. Dividends Company distributes Tender Offer excess cash to all current Issuer sponsored shareholders without liquidity program by decreasing their ownership third-party investors pursuant to 14(e)Source: Goodwin ProctorCopyright 2011 HighStep Capital. All rights reserved.
  • 5. Secondary Examples S B $180 MM $900 MM D TO $400 MM $1,600 MMCopyright 2011 HighStep Capital. All rights reserved.
  • 6. Understanding Twitter’s Secondary ApproachCopyright 2011 HighStep Capital. All rights reserved.
  • 7. Characteristics of a Secondary InvestorInvestors not operatorsPassive approach – no board seatsTypically more analytical – we love data Mid-cycle investorsPatient investorsSimilar to investing in a small cap companyCopyright 2011 HighStep Capital. All rights reserved.
  • 8. Secondary Investors are Not Venture Capitalists Primary Secondary Company issues “alphabet” Investors purchase existing round preferred shares to shares from individuals, investors who sign various small groups or institutional shareholder agreements investors.We solve liquidity problems for shareholders. VCs buy shares in emerging business We buy shares from shareholdersWe don’t compete with VCs because of the Dodd-Frank 20% non-qualifying ruleCopyright 2011 HighStep Capital. All rights reserved.
  • 9. Time to Exit has Increased Median Age at IPO 12 10 8 6 4 2 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NVCA, Jan 2011Copyright 2011 HighStep Capital. All rights reserved.
  • 10. Why Companies Mature Before an IPO IPO performance from 1980-2010 Sales # of IPOs Avg 1st Day Return Avg 3yr Return <$50m 3,897 23.60% 5.00% $50m+ 3,457 12.00% 39.10% IPO research from Prof. Jay Ritter, University of Florida – as of 6/1/11 http://bear.cba.ufl.edu/ritterCopyright 2011 HighStep Capital. All rights reserved.
  • 11. The IPO Gap is Widening Private company secondary funds are the new small cap funds Private Secondary Environment in 1990s Today’s Environment Exchanges IPO Public VC Markets Public VC IPO Gap Markets1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Source: Arcstone Research Copyright 2011 HighStep Capital. All rights reserved.
  • 12. The IPO Gap Creates the Opportunity Public VC IPO Gap Markets 1 2 3 4 5 6 7 8 9 10 • Buyers & Sellers Maturing • Ecosystem Emerging • Laws DevelopingCopyright 2011 HighStep Capital. All rights reserved.
  • 13. Secondary Investors Relieve the Pressure Cooker • Employee cash constraints • Investor Fatigue • VC fund life • 500 shareholder limitCopyright 2011 HighStep Capital. All rights reserved.
  • 14. Ecosystem Is DevelopingMarketplacesBanks & Law FirmsResearch & Sales Funds Social + Capital Copyright 2011 HighStep Capital. All rights reserved.
  • 15. Sample of Companies TradedCopyright 2011 HighStep Capital. All rights reserved.
  • 16. IPO Gap Historical CompaniesCopyright 2011 HighStep Capital. All rights reserved.
  • 17. Legal Framework is Developing•General Solicitation Rule – Private Shares •413-11: HR 2940 – Access to Capital for Job Creators Act – Rep McCarthy (R-Cali)•Simplified Registration: $5m => $50m •421-11: HR 1070 – Small Company Capital Formation Act – Rep Schweikert (R-Ariz)•Crowdfunding Rule: up to $5m •407-17: HR 2930 – Entrepreneur Access to Capital Act – Rec McHenry (R–NC)•500 Shareholder Rule => 1,000 shareholders •HR 2167 – Private Company Flexibility and Growth Act – Rep Schweikert (R-Ariz)•Open Issue: Investing Without Company FinancialsCopyright 2011 HighStep Capital. All rights reserved.
  • 18. Copyright 2011 HighStep Capital. All rights reserved.
  • 19. Facebook is Dominating Time SpentCopyright 2011 HighStep Capital. All rights reserved.
  • 20. Facebook monetizes more like Yahoo today 190,000 $35,000 185,000 $30,000 180,000 $25,000 175,000 $20,000 Uniques 170,000 $15,000 Revenue 165,000 $10,000 160,000 $5,000 155,000 $0 Google Yahoo FacebookCopyright 2011 HighStep Capital. All rights reserved.
  • 21. Current Facebook: Timeline StuffingCopyright 2011 HighStep Capital. All rights reserved.
  • 22. Search vs Social GraphSource: LiquidNet & Alexa, Dec 2011Copyright 2011 HighStep Capital. All rights reserved.
  • 23. PageRank vs PeopleRankCopyright 2011 HighStep Capital. All rights reserved.
  • 24. Google: Ads next to Relevant PagesPaid SearchNatural Search Copyright 2011 HighStep Capital. All rights reserved.
  • 25. Future FB: Ads promoted by Relevant PeopleCopyright 2011 HighStep Capital. All rights reserved.
  • 26. Brands target People, People become BrandsCopyright 2011 HighStep Capital. All rights reserved.
  • 27. Google Adds Social Into SearchCopyright 2011 HighStep Capital. All rights reserved.
  • 28. Facebook Shares Trends$40.00$35.00$30.00$25.00$20.00$15.00$10.00 $5.00 $0.00Source: SharesPostCopyright 2011 HighStep Capital. All rights reserved.
  • 29. Facebook Shares Trends 10% 5% 0% -5% -10% -15% -20% S&P 500 FacebookSource: SharesPostCopyright 2011 HighStep Capital. All rights reserved.
  • 30. Facebook Shares Trends SharesPost Private Markets11/17/2011 75,000 $30.00 11/9/2011 250,000 $30.0010/27/2011 70,000 $32.00 11/22/2011 3,500,000 $30.00 9/27/2011 50,000 $32.10 11/9/2011 500,000 $30.50 9/1/2011 50,000 $33.00 11/9/2011 9,000,000 $30.50 8/17/2011 100,000 $33.00 10/28/2011 4,000,000 $31.00 8/4/2011 150,000 $34.00 11/9/2011 500,000 $31.50 7/20/2011 150,000 $35.00 11/9/2011 3,000,000 $31.50 7/7/2011 150,000 $35.00 11/9/2011 10,000,000 $31.50 11/9/2011 10,000,000 $31.75 Marketplaces were about 15-20% of the total market in 2011Copyright 2011 HighStep Capital. All rights reserved.
  • 31. Facebook Ownership TableOwner Name Type of Owner % Ownership Owner Name Type of Owner % OwnershipFacebook Employees Management 25% Interpublic Group Corporate 0.40%Mark Zuckerberg Individual 24% Adam DAngelo Individual 0.40%Accel Partners Venture Capital 14% Chris Hughes Individual 0.40%Dustin Moskovitz Individual 6% Matt Cohler Individual 0.40%Digital Sky Technologies Private Equity 5% Jeff Rothschild Individual 0.40%Eduardo Saverin Individual 5% Owen Van Natta Individual 0.40%Sean Parker Individual 4.0% T. Rowe Price Group Mutual Fund 0.25%Peter Thiel Individual 3.0% Reid Hoffman Individual 0.25%Foreign Goldman Sachs Clients Other 2.8% Mark Pincus Individual 0.25%Greylock Partners Venture Capital 1.5% Samwer Family Trust Individual 0.10%MeriTech Capital Partners Venture Capital 1.5% General Atlantic Private Equity 0.10%Elevation Partners Private Equity 1.5% Ezra Callahan Individual 0.08%Microsoft Corporation Corporate 1.3% Kleiner, Perkins, Caufield & Byers Venture Capital 0.073%Goldman Sachs Private Equity Private Equity 0.8% Cameron Winklevoss Individual 0.022%Li Ka-Shing Individual 0.75% Tyler Winklevoss Individual 0.022%Jim Breyer Individual 0.50% Divya Narendra Individual 0.022%Western Technology Investment Venture Debt Fund 0.50% GSV Capital Corp. Venture Capital 0.010% Source: PrivCo Copyright 2011 HighStep Capital. All rights reserved.
  • 32. How To Buy Facebook SharesCopyright 2011 HighStep Capital. All rights reserved.
  • 33. How To Buy Facebook Shares• Step 1: Buyer decides to buy Facebook shares• Step 2: buyer hires B/D as a buyer agent• Step 3: buyer agent puts word into B/D cloud• Step 4: Engineer hires a private wealth manager• Step 5: PWM hires lawyer or B/D as seller agent• Step 6: seller agent puts word into B/D cloudCopyright 2011 HighStep Capital. All rights reserved.
  • 34. How To Buy Facebook Shares• Buyer: Non-binding Letter of Intent: shares, price, buyer• Seller: returns an Expression of Sale: price is binding• Buyer: produces a proof of funds• Seller: produces a proof of shares• Seller’s attorney: arranges escrow & produces a stock transfer agreement• Signatures: both parties sign & date• Seller’s attorney: delivers STA to Facebook for RoFR• Closure: RoFR waived, shares & $$ are exchangedCopyright 2011 HighStep Capital. All rights reserved.
  • 35. Phase 1 = Wild West B/D Economics: $250m / $32 = 7.8m shares * (4% com * $32) = $10mCopyright 2011 HighStep Capital. All rights reserved.
  • 36. Phase 2 = Company Liquidity Programs• A shareholder selling plan initiated by the company with board approval• Buyers are pre-approved• Minimum investment sizes are established• Employee sales policies are established• Regular sales windows are established• Select financials are disclosed with pre-approved buyers under NDA• Organized access to management & ongoing reportingCopyright 2011 HighStep Capital. All rights reserved.
  • 37. Pabst Blue Ribbon - Crowdsourcing Binge Goal: raise $300m to buy Pabst Blue Ribbon $5: Bottle Membership $25: Six Pack Membership $100: Case Membership $250k: The BrewMeisterCopyright 2011 HighStep Capital. All rights reserved.
  • 38. My Market Predictions • IPO Gap continues to widen • Companies adopt liquidity programs • Venture capitalists get their 5 year investment cycle back • Hedge funds & Mutual funds move in • Private Market Liquidity Funds emerge as a new asset classCopyright 2011 HighStep Capital. All rights reserved.
  • 39. The Soho Loft Conference Monday 1pm-8:30pm New York City Keynote: Rep, Patrick McHenry – Crowdsourcing Notables: Founder, Arcstone Research Founder, GSV Capital GP, Greencrest Capital Dir of Private Shares, GFI Group Dir of Private Shares, LiquidNet CEO, Gate Technologies www.thesoholoft.comCopyright 2011 HighStep Capital. All rights reserved.
  • 40. Jason Jones jjones@highstepcap.com 914.315.9751 @cardinalrosehttp://www.slideshare.net/jjones23 New York | San Francisco