June 17, 2009
It’s no secret the time from initial startup to exit is growing longer for VC-backed startups and other private companies. The latest data I’ve seen indicates the average time to exit (and thus shareholder liquidity) is now in the 7-8 yr range.
A number of companies including SharesPost, SecondMarket, Xchange, and InsideVenture have launched recently to try to address the illiquidty challenge. And players in the PE secondary market have been quietly purchasing individual company stakes, in addition to VC fund positions, for a number of years. Various stakeholders in a private company may have different perspectives on whether enabling some shareholders to receive liquidity is a good or bad thing. VC’s investors holding preferred shares, co-founders holding common shares, employees potentially holding common shares from stock option exercise, CEOs and boards who have to deal w/ all of these shareholders.
I played around a little bit with SharesPost the other day and I have to say it seems like a pretty interesting platform for potential buyers or sellers of private company shares. They currently only deal in common shares typically held by co-founders or employees, but anticipate adding preferred shares in the future. Supposedly one private transaction, for shares of Tesla Motors, has already gone into contract and as of this writing there are offers to buy or sell shares for a variety of other companies including eHarmony, LinkedIn, Facebook, Solar City, and Linden Lab (Second Life). I also have to say that SharesPost seems to have done a very thorough job of thinking through the legal and logistical challenges surrounded with company shares (i.e. right of first refusal and other restrictions on transfer).
These sorts of secondary markets for private company shares are not without their challenges, but overall I think they make a lot of sense. But the biggest challenge to any marketplace model is building a critical mass of of buyers and sellers, i.e. reaching genuine liquidity. We’re talking about trading assets that by definition are already highly illiquid, so I wonder if having 4+ platforms all vying to build liquidity in these early days will mean none can achieve critical mass. I hope not, but we’ll see how things develop…