Secondary Markets Bank on Exiting VCs to Fuel Auctions

A Twitter post, immediately following the back-to-back SharesPost and SecondMarket West Coast events, served as an echoing reverberation of the growing clout of private stock auctions as an industry.

Said JenniferJones, “all of [Fred Wilson’s] (union square ventures) fund profits currently are through secondary sales says Jamie Montgomery.”

Wilson, when contacted by peHUB, called the tweet totally inaccurate. Even if it’s not, he and Union Square Ventures would not be the only VC quietly striking deals and making partial exits from stakes on secondary markets like Sharespost and SecondMarket, or through private brokers. This represents a shifting in gears for private stock auctions—whereas a couple of years ago, a few early sellers set up small transactions in startups, now, bigger investors are out to acquire substantial pieces of likely IPO candidates.

Several VCs that spoke with said they have held meetings with SecondMarket executives and were pitched on the premier secondary market’s trading platform. These sources said they already were, or had plans to, bringing shares of more startups to the SecondMarket’s auctions. The expansion in the breadth of startups to buy into is perhaps as important as the increasing size of the investors clamoring to buy into late-stage VC investments. While the venture capitalists said they are marketing portions of stakes to buyers, but they declined to address which companies they were selling.

One said he didn’t want to name which company he was selling positions in because of “how it would look.” He elaborated that he did not want to bring undue bad press or assumptions onto a company by proxy of being an investor intimately familiar with its operations and selling off a sizeable portion of said start-up before an IPO. Besides, the investor acknowledged, the VC still maintains a portion of the investment which neither he nor his employer wish to see impacted.

The VC’s comments underscore the paramount desire for nearly all participants in secondary market trades: privacy. Companies looking to consolidate shareholder bases to avoid regulatory burdens make last-second right of first refusal claims and buy stock from sellers, to the consternation of would-be buyers that committed to a deal first. Further, any substantial shift in their shareholder base could foreshadow a shift in investors’ capacity to support future fundraisings and growth (or, foreshadow a hasty push to an IPO by a new shareholder eager to reap returns).

Thanks to secondary market operators’ NDAs that are requisite for start-ups, buyers and sellers alike, it is possible—likely, even—that some start-ups will make news when they file S-1s that reveal new VCs or other institutional investors as substantial shareholders. This may provide overnight validation to some recently-raised late-stage VC funds that have turned to secondary market transactions to latch onto big-name companies on the precipice of going public. Before any of this happens, however, secondary market operators will make a killing.