SecondMarket Looking Into Cutting Out the Middleman (VC Firms)

SecondMarket is looking into the possibility of allowing private companies to bypass venture capital firms and sell shares directly to individual investors, peHUB has learned.

“It creates a very interesting opportunity for us as a business,” SecondMarket CEO Barry Silbert told peHUB, adding, “We’re not doing this right now.”

SecondMarket provides a market where private company shares can be bought or sold. (A company’s shares can only be bought or sold if the company approves.) Demand for shares in hot Internet companies has grown to such an extent that even brand name venture firms — like Kleiner Perkins Caufield & Byers and Andreessen Horowitz — have purchased shares via secondary transactions.

SecondMarket charges sellers between 3% and 5% of the value of stock being sold, putting it in line for a massive revenue opportunity if it allows companies to sell shares directly on its exchange. With growing interest in popular Internet companies, such companies could theoretically sell shares on SecondMarket at a higher valuation than they might get from a venture capital firm — driving up overall valuations for Internet companies.

SecondMarket’s business has evolved at a rapid pace, and the frothy fundraising market for Internet companies will likely solidify its position as a dominant player in the private stock trading industry. Still, it remains to be seen what, if any, regulatory roadblocks would emerge either with government agencies or with the Financial Industry Regulatory Authority should SecondMarket move forward with a plan to expand its trading platform to include new fundraisings. Earlier this year, the company revealed an ambitious expansion plan that will bring to 12,000 the number of private companies listed on its site.

“This market is exploding,” Silbert said.

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4 Comments

  • This is going to make for some great episodes of American Greed in few years!

  • No published numbers for this “exploding” market other than ridiculous valuations for companies. I can’t believe that they can get clearence from the SEC. Qualifing someone as QIB is also going to be a lot tougher process than it has been.

  • Those of us who lived through the internet bubble at the end of the 20th century may remember a company, Off Road Capital, which tried something similar only to crash and burn. The current hyper valuations and plethora of ” me too” social networking based companies is showing frightening similarities to the situation that existed at the end of the 1990′s including near desperation by certain investigators to jump on any company without engaging in proper analytical thinking and due diligence. Let’s hope that enough investors remember the debacle of decade ago to keep events in check this time.

  • I run a VC fund. I have invested in companies with other VC fund investors, and also with angels. I think the key point to keep in mind is that this kind of investing is a lot of work. Due diligence work is very time consuming, and many deals do not result in a financing. Then there is the work of being a director, assisting management with business strategy and introducing potential hires. If private investing is so easy, there would be no need for VCs.

    Of course, once companies become sizable, then the investment is more like buying any company on the public market, and here the private secondary market is appropriate.

    We destroyed the market for small public companies by separating research from investment banking, so that there is no one to analyze these stocks. (Of course Sarbanes Oxly vastly increased the expense of being public, too.) I think this all flows from a feeling that “content should be free.” Well, it isn’t if somebody has to do the work.

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