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Secondary Markets May Squeeze VCs on Both Ends

Recently, venture capital firms have had to contend with increasing investor interest at virtually all levels of the startup funding ecosystem. Angel investors are flooding the woodwork, pumping capital into early stage companies on a widespread basis, changing how startup capital is raised.

Now, VCs are competing with secondary market investors at the other end of a company’s lifecycle.

Sharespost plan to run a direct-to-secondary-investor fundraising platform to serve companies seeking to raise new capital, CEO Dave Weir told peHUB.com. However, Weir said, the Sharespost platform will specifically concentrate on raising capital for late stage companies.

“We see the market we’re offering as being complimentary to VCs,” he said, adding that Sharespost will only include “companies that have already completed a round or two of venture financing.”

No different than Sharespost secondary shares trading, the direct financing platform would only be open to accredited investors, Weir said, and it may be operational in as little time as a few months.

Earlier, peHUB.com broke the story of how Sharespost rival SecondMarket is considering a platform that would be broader in scope than Weir’s Sharespost. While SecondMarket CEO Barry Silbert said nothing is finalized, the secondary trading exchange could offer early stage investors an opportunity to buy into companies conducting new rounds of fundraising, as well as late stage investors.

However, it remains to be seen how quickly Sharespost can implement planned changes. Weir said the company applied to the Financial Industry Regulatory Authority to be registered as a broker-dealer in January, and that he hopes the process will only take six months to complete.

Responses to the rapidly-changing fundraising ecosystem have been mixed. Readers of peHUB.com weren’t quite sure what to think. Some entrepreneurs have expressed excitement at the prospect of the field of prospective investors widening, especially as SecondMarket provides companies approval rights over their private stock trades, allowing them to effectively control their shareholder base.

For the operators of secondary markets, further entrenching themselves in a startups’ fundraising process will not just generate additional revenue, it will likely create a frothier secondary stock market, at least for companies that see their new funding rounds oversubscribed. Abbreviating the time in which private stock stakes are amassed, and then distributed, will contribute to secondary market operators’ revenue—aside from, of course, percentages earned by exchanges through the new fundraising executions.

Still, venture capitalists are quick to point out the differences between online auctions and their business development platforms.

“I find it hard to think it’s going to be a threat,” said one top-tier VC, who pointed out that individual investors lack the relationships and, often, the operational experience a venture capital firm’s senior managers can provide.

Another prominent VC said he doesn’t think “really good companies will use the platform,” adding “entrepreneurs tend to have their own network of VCs and will continue to work with a small number of VCs who they know well.”