2. Table of Contents
Market Overview
Deal Mechanics
Completing a Transaction
Appendix
2
3. Private Company Marketplaces
Private company marketplaces will solve
the liquidity problems for employees and
board members while also providing
inexpensive access to growth capital
3
4. Private Company Secondary Markets
“Late stage venture funds are like the
small cap funds of the „90s and the early
2000s.” Lawrence Lenihan, Jr, FirstMark Capital, April 2011
4
5. My Prediction
Private company marketplaces institutionalize changing the industry:
• Many companies institute alternative liquidity programs
• The majority of these programs are on listed private marketplaces
• SEC introduces regulation that strengthens the market
• IPOs get pushed out further expanding the late stage market
• Stronger companies emerge as a result of longer gestation period
• Marketplaces experience rapid growth replacing antiquated private placements
The lines blur between late stage venture funds and hedge funds
• Late stage funds reduce lockups from 10 years to 5 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
5
6. The IPO – Pros & Cons
Pros:
• Gain liquidity for shareholders
• Gain access to growth capital
Cons:
• Sarbanes Oxley
• Headaches, regulation & compliance
• Exposure to class action legal risks
• Wall Street disconnect
• Short term trader mentality
• Algorithmic trading disconnected from fundamentals
• Loss of cache
6
7. The Public Markets – Drivers of Change:
• Sarbanes Oxley
• Trading decimalization
• Separation of investment banking and research
• Consolidation of boutique banks
• Longer pre-IPO gestation periods
7
8. Current Late Stage Market Overview:
• There is ~$21b invested in late stage deals per year
• Traditionally 30-50 funds participate in this market
• Private marketplaces completed $500m in 2010
• The private marketplace industry will grow to $10b
within 10 years, possibly sooner
8
9. Ideal Private Secondary Market Company:
• $100-$500m in market cap • Too small to go public
• $20m in revenues • Tech and Clean Tech sectors
• Could expand to private equity
• Approximately 5 years old deals
• Don’t have to be profitable
• Venture backed
• Over 100 shareholders
9
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
10
11. The 4 Horsemen:
Company Date Funding Last Round Val Recent Rumored Val Revs 2011E P/S
Facebook Jan-11 $1.5b $50b $75b $4b 19x
Groupon 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 50x
Source: Company reports and Business Insider
11
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
12
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
• Alternative liquidity programs must be established
13
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
14
15. What is a “Listed” Private Market?
• Company and board approved
• Controlled sales
• Limited Selling Windows
• Market Creation
• Right of First Refusal
15
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
16
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
17
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
22
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
23
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
24
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
26
27. Additional Risks:
• Illiquidity
• Opacity
• Information Asymmetry
• Valuation
• Behavior of secondary investors
• Shift from options to RSUs
27
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
28
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
48
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
49
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
50
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
51
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
52
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
53
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
54
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
56
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
57
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
58
59. Thank You
Jason M. Jones
jjones@highstepcap.com
914-315-9751
Follow me on Twitter: @cardinalrose
Profile on Google: /profiles.google.com/jjones1