Late last month, having received the blessing of the SEC and the Financial Industry Regulatory Authority, the highly anticipated startup Xpert Financial emerged from stealth mode capable of automating the business of providing liquidity to startups. The question now for the San Mateo-based alternative trading platform is: who cares?
In addition to having to compete with supercharged competitors like SecondMarket and SharesPost, skepticism over its mission abounds, including from one prominent San Francisco-based investment banker, who privately observed to me last week: “Each process is highly customized and securities issues are unique, making it very difficult to execute these processes on a uniform basis. If it were easy, people would do it on eBay.”
Xpert’s founder, Thomas Foley, is eager to prove naysayers wrong, and says his startup already has widespread buy-in, from the startups whose shares it hopes to list, to family offices, private wealth management groups, and institutional investors like Franklin Templeton and Fidelity that are interested in a new way to back fast-growing startups. VCs including Tim Draper — who is among other angels to give Xpert $3 million in funding to date — are also enthusiastic, says Foley. (Given that Xpert provides them another venue to recover their investments, as well as to potentially supercharge their startups’ valuations, it wouldn’t be a surprise.)
On Friday, I talked with Foley about the company and its timing. Our conversation, edited for length, follows.
Since coming out of stealth, you’ve been touting Xpert’s automated process. But when it comes to secondary shares, at least, it’s all about liquidity. As a latecomer to that market, how do you compete with a SecondMarket, where all the action is already?
Well, we’ve been talking with VCs about the company since the end of 2008. It’s just the regulatory solution with the SEC and FINRA takes a little longer if you do it right. [Ed: SecondMarket was founded in 2004 and launched its private company marketplace in April 2009.]
[And] we work directly with companies to list on our system, rather than [competitors] out there that work with ancillaries and alert companies after the fact [so the companies can] exercise their first right of first refusal if they want. Ours is a pretty different relationship [to the company].
And are these relationships real or hypothetical at this point? Are you working with Facebook?
Right now we’re getting companies to go through the listing process, and we’re anywhere from the early stages to much further along, with some companies. But every company we’ve talked with is interested. [And] the really exciting thing is that there’s only been a focus on super-big social media companies, but because we’re getting good information on these companies for our investors, it’s going to let us [and investors] expand outside of Silicon Valley [to] companies that Summit and TA have consistently gone after: those with between $10 million and $500 million in [annual] revenue. And that opportunity dwarfs the public markets.
What kind of shares can investors expect to find through your platform?
We have a focus on both primary and secondary shares. Because we’re working with the companies, we want to be a venue for them to raise capital, in lieu of and possibly leading up to an IPO. [As for secondary shares], we think we can do more by getting more closely aligned [with startups]. What we’ve seen so far is one-off brokering of small amounts of private securities that have been very speculative because of the lack of financial information available. Also, the amount of successful deals has been quite small.
What do you mean by successful?
Our determination of a successful deal is: a buyer sees a deal, agrees on the price, and gets the deal. What’s often happening instead is that a buyer sees a price — let’s say for Facebook shares — and says, “I’ll buy at that price.” But because no one is really working with the companies, in some cases – Facebook in particular – the right of first refusal gets executed, and that potential new investor gets blocked out. The whole process is expensive and lengthy for the companies. It also makes investors feel used, because they’ve prepared their capital and legal documents [and so forth].
We’ve built in controls that allow the startups to present information and offer their shares in a way that investors know they’ll get the shares they are asking for, the shares will be transferable on our platform [almost immediately, versus the sometimes 30 to 60 days it can now take for transactions to be processed].
What’s your fee structure and who pays you?
We take a percentage off capital raises and any secondary sales. We haven’t confirmed it [but we're thinking 2 percent right now]. On capital raises, we’re paid by the seller; on the secondary side, it’s half and half.
And what do you imagine will become a typical transaction size?
The idea is that if they’ve begun to prove themselves, [we can help] growth to late-stage, pre-IPO companies to [raise between] $20 million to $250 million. Then on the secondary side, it depends on what companies decide, but likely [we’ll help facilitate secondary trades ranging from] between $25,000 and $100,000. As more companies list on the system, we’ll do more secondary transactions, but we expect to facilitate more primary transactions to begin with. It was the same with Nasdaq when it started up. It was IPOs, then trading took over a much larger percentage [of its business].
Obviously, as we go down the spectrum, there are more companies as you get smaller, including those with $20 million to $50 million in revenue that are interested in doing C, D and E rounds. And rather than turn to Sand Hill Road only, [we can connect them to] family offices, hedge funds, institutional guys like Franklin Templeton and Fidelity, as well as to the accredited investor community. But what we’re talking about [initially targeting] are companies that are in the S-1 category but are either frustrated with the investment banking community because they can’t go out, or, that want to stay on our system for a year before they go out [into a more hospitable public market].
There’s a real demand for access to this asset class.
Do you have any concerns that as most actively traded companies on the secondary market go public, it could slow you down? A Facebook IPO could open the door to many other offerings, not to mention dampen secondary trading activity.
No, once these top five companies go public, there will be another five, then another five. We actually feel very comfortable about this because we’re already working with the next round of companies growing up.
How much will Joe Public know about what’s available to buy on Xpert?
We’re about discretion, so [no information will go through out system that isn’t pre-approved by the companies and disseminated the way they want it disseminated]. People outside the system won’t know prices of valuations; they’ll just know what companies are available.
Might that prove a cultural hurdle for startups? Will they worry they’ll look desperate if they list at Xpert?
I hope it’s a badge of honor. Because they’re in the system, it just means they’ve gone through the process and can get quick access to capital or access to liquidity. It means they’ve graduated to a point that they are a viable company that can provide a currency to employees and shareholders and gain quick access to capital for acquisitions, investments, etc. So this is definitely not seen as any sign of desperation.
When we will see companies start to list – and will you look for your next round through your own platform?
Because it takes a little time to get their information ready and we don’t want to rush them through the process, we [expect to begin listing companies] in late Q1 or early Q2. And we’ll definitely be needing growth capital as we go and we’d absolutely list ourselves. It’d save us a lot of time, and we’d have access to a lot of good buyers.