It has been an amazing couple of weeks for SecondMarket – no, not because Ashton Kutcher is a now a shareholder. It was amazing because SecondMarket completed a secondary offering on its own marketplace and now there is real movement in Congress to alter securities laws that will change the future of many companies and the capital formation process.
FirstMark is a shareholder in SecondMarket and we invested in it because we thought it could change the financial services industry by creating an alternative to the horror show that the public markets have become. As VCs, we are acutely aware of the challenges of a public offering: trying to get liquidity in a thinly-traded stock where Wall Street traders pick us off like fish in a barrel knowing we need to sell our shares. Good luck to my colleagues in the industry who took their companies public in the frenzy of IPO’s in the last 6 months – 63% of the IPO’s that went out this year are trading below their offering price. Yes, all these companies have/will beat their numbers in their first quarter of reporting, but if you don’t think those numbers were baked in six months before their IPO, I have a bridge in Brooklyn to sell you. These companies are trading at a discount because the public market does not understand what they do, many of them are way too immature to go public and there is no public float. Yes, the markets have stunk, but many of these new stocks have stunk more irrespective of their operating performance.
Can we finally all agree that the notion that Sarbanes Oxley was stopping companies from going public was just dead wrong – none of these companies would have gone out if it were the case. So let’s stop wasting time arguing about how this regulation has killed the IPO market. What was stopping companies from going public was that until earlier this year, nobody was willing to pay unbelievably insane values for these companies. But suddenly, everyone got Facebook fever and the window miraculously opened and greed overcame the desire to build your business patiently. When people start throwing money out of the window, grab a bucket to catch it! What we will learn over the next few months is that many of these companies will suffer a slow and anonymous death as a moribund public stock. No research, no liquidity, no interest from large public investors because they can’t get in and if they did, they would not be able to get out. These companies will be well-capitalized, but at what cost? How can they build a business that can change the world or the industries in which they compete by being measured on EPS on a quarterly basis? It’s insane.
SecondMarket has gotten a load of publicity through its trades of Facebook and others, but what I, as a significant shareholder in SecondMarket, view as more important is that we now have several other companies that have created private markets on our platform. And more are coming each month. The innovation of SecondMarket is that it changes the capital formation process from being binary (private or public) to one that is now a spectrum (more private or more public) that enables a company to establish a market for its stock that is representative of where it is in its business formation process. Maybe you want to trade every day? Maybe once a year? Maybe with all eligible investors? Maybe with only people you select who feel will hold your shares for a long time as you build value? There is no right answer – the right answer is what is right for your company. That is what SecondMarket provides: a trusted platform (trusted for both the company and the investors), where there are clear rules and expectations among all parties, that is transparent and accountable and is built for what you need and where you are in your business. SecondMarket is now a client of SecondMarket and faces the same issues all of its clients will face (Check out Barry Silbert’s view on eating his own cooking) and can lead the way for the many other companies that will follow suit.
On the legislative front, I now firmly believe that congress will change an important part of the securities regulations that will increase the number of shareholders a company can have before having to file publicly and it will also modify the general solicitation requirements that govern fund raising. These changes will pave the way for companies to stay private longer as they execute on their business vision. They can access capital or liquidity in the manner that suits them most and postpone a broader public IPO filing until they are much more mature in their business development. This means that more companies can take advantage of what SecondMarket offers longer.
I honestly believe that SecondMarket holds the future for the success of entrepreneurs and this country. Access to capital is what made our nation into what it is today. Unfortunately, the markets that delivered us to this point no longer fulfill this requirement. Something has to fill this void and I think it is SecondMarket. I may be accused of talking up my own investment, but FirstMark just voted with our pocketbook – we did not sell a single share in this recent offering. There is way too much opportunity ahead of this company to do so. But one day, when we have to get this money back to our Limited Partners, I know I have a place to go where I will be able to accomplish this task!