This article, which previously ran in affiliate publication Venture Capital Journal, was written by Greg Brogger, founder and CEO of SharesPost Inc.
Silicon valley is abuzz with bubble talk.
It’s the VC conversation starter of choice these days. Frequently, the topic segues into unease about the increasing competition for deals from Silicon Valley newcomers. The argument goes that the new investors are inflating a bubble in the venture asset class by bidding up valuations. Often there is nostalgia for the days when investment in the best private growth companies was essentially a private matter involving only a small group of bankers and venture capitalists.
Bubbles are indeed something to fear. They are not just scary for the direct participants, but destructive to the innovation economy generally. As valuations tumble and investors flee to less volatile securities, good companies can’t find capital. Years can pass before a healthy capital market restores itself in the wake of a burst bubble. In the meantime, the primary driver of U.S. economic growth struggles without adequate growth capital.
What I believe often gets missed in these conversations, though, is that greater liquidity and transparency are always the best ways to avoid bubbles.
Liquidity is the answer
Consider why venture is so susceptible to bubbles.
Bubbles thrive in illiquid, opaque markets. Venture is an extreme example of both. Private companies do not publicly publish their financial data. Nor do they publish valuations from primary financings or secondary transactions. When investment can only flow into (not out of) a company and valuation information is infrequently available, it’s easy for investors to far “overshoot” intrinsic value.
George Soros once said, “[s]tock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.” Combining the natural enthusiasm for the world’s most exciting companies with the lack of transparency and liquidity traditionally associated with this asset class makes it easy for bubble-inflating misconceptions to occur.
The solution is not to circle the wagons against new sources of capital seeking access to the asset class. I believe the answer is to go the other direction, to increase transparency and liquidity. Doing so won’t eliminate fluctuations in value or turns in the market. However, it should go a long way to replacing the mayhem of bubbles bursting with something more like orderly corrections.
This does not mean private companies should embrace the same degree of liquidity and transparency as public companies. Private companies are staying private for a reason. They want shareholders that are supportive of the long-term building of value and to ensure that sensitive information is not disclosed to competitors. These needs can be met while still creating an efficient market.
New era for the venture community
Many private companies are going to continue to stay private longer and so more of them will likely become much larger than the largest, VC-backed, private companies of a decade ago. This structural shift in the capital market divide between public and private seems irreversible at this point and it’s accelerating.
The number of unicorns, their value, the capital they are raising, the amount of secondary liquidity and the efficiency of the market generally are all plainly increasing at a rapid pace.
Given their size and the number of them (153 at last count), unicorns need something far more robust and efficient than what worked in the past.
Democratizing the venture asset class
In my view, the largest part of the innovation economy now lives in the private market.
That’s not to be feared. However, being private need not and should not mean closed, illiquid or opaque. What’s healthiest for the venture asset class and for the overall U.S. economy is for all investors to have access to the potential growth returns to be found in the private market. We need new solutions to efficiently channel capital from a broader spectrum of investors and into the asset.
The venture community should embrace this change and evolve for the good of all of its constituents.
Greg Brogger is founder and CEO of SharesPost Inc, parent company of SP Investment Management, investment advisor to the SharesPost 100 Fund and SharesPost Financial Corporation.
This guest column first appeared in affiliate magazine Venture Capital Journal, which is published by Buyouts Insider. Subscribers can read the full column and other exclusive content by clicking here. To subscribe to VCJ, click here for the Marketplace.
Photo illustration courtesy of Shutterstock.
Photo of Greg Brogger courtesy of SharesPost.
Correction: Due to an editing error, the top line of this post was omitted, but it has been restored.
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