Veteran Secondary Investors Say It’s Not a Bubble, But There’s Froth

“In the first six weeks of 2011 alone, we witnessed a greater volume of secondary transactions in venture-backed companies than in all of 2010–which was itself a record year.”

That was the sentence, pulled from an upcoming release by partners at secondary firm Millennium Technology Value Partners, that caught my attention. The twelve-year-old firm, which closed a $284 million fund last year, has put together a compendium of predictions for the red-hot venture secondary space over the next couple of years.

Forecasts range from the bullish–such as the projection that a trillion dollars worth of public market value will be created by 500 of today’s private technology companies–to the concerned–like the observation that many current buyers of private shares are completing transactions despite scant data on underlying company financials.

MTVP is what one might consider the old guard in the increasingly popular investment strategy of buying founder, employee and early investor stakes in hot technology companies. Over the last decade, it’s completed 300 secondary transactions, including companies such as  Facebook, Chegg, Twitter, Zappos and, PlaySpan, which itself was acquired by Visa earlier this month. And while not every investment has been a winner, the firm has had an impressive string of hits, particularly from deals carried out in the depths of the financial crisis in 2008 and 2009, when shares of Facebook could be had for a fraction of their current price.

Among the firm’s other predictions:

•    This year will be a record-breaking one for secondary venture capital investments.

•    Secondary investing in private technology companies will become a $10 billion annual market sometime over the next three years.

•    Venture-backed technology IPOs will surpass the recent record year (2007) in dollar volume of new public offerings.

After reading the prediction list, I chatted a bit with Millennium Managing Partner Dan Burstein, who spoke in defense of escalating valuations being attached to hot social networking plays, in particular Facebook.

For Facebook, Burstein says, he finds it valuable to compare the company’s private valuation to that of publicly traded, the Chinese Internet and search portal, which currently has a valuation around $45 billion. If one considers Baidu fairly valued, then Facebook ought to arguably be worth more, as its global reach is broader.

Still Burstein concedes, he is seeing some bubbly activity in the secondary space, particularly given that only some companies stand out as true leaders in their segments. Additionally, he says, he is concerned many investors aren’t doing sufficient diligence before buying shares on secondary exchanges, sometimes completing transactions without sufficient knowledge of capitalization tables, liquidation preferences, and earnings.

“I’m not trying to brand what’s happening now as an overblown bubble, although there is obvious froth in the market,” he says. “This period is very different from 1999-2000— when companies that were untried, untested and had no revenues were being invested in at very high valuations. Most of the extremely high valuations we hear of today are for companies that have either demonstrated tremendous real revenue traction or have introduced business models that are very evidently scaling very rapidly.”