2. Table of Contents
Market Overview
Deal Mechanics
Completing a Transaction
Appendix
3. Private Company Secondary Markets
Private company secondary markets will
solve the liquidity problems for employees
and board members while also providing
inexpensive access to growth capital
4. Private Company Secondary Markets
“Late stage venture funds are like the
small cap funds of the ‘90s and the early
2000s.” Lawrence Lenihan, Jr, FirstMark Capital, April 2011
5. My Prediction
Secondary markets institutionalize changing the industry:
• Many more companies adopt secondary marketplace platforms
• SEC introduces regulation that strengthens the market
• Late stage market expands and IPOs get pushed out further
• Stronger companies emerge as a result of longer gestation period
• Secondary marketplaces experience rapid growth replacing antiquated systems
The lines blur between late stage venture funds and hedge funds
• Late stage funds reduce lockups from 10 years to 2 years to adjust for liquidity
• Hedge funds allocate 10-30% to less liquid secondary markets
•Balanced with market neutral public markets
• Massive amounts of capital flow into this new asset class
6. The IPO – Pros & Cons
Pros:
• Gain liquidity for shareholders
• Gain access to growth capital
Cons:
• Sarbanes Oxley
• Headaches, regulation & compliance
• Additional legal risks
• Wall Street disconnect
• Short term trader mentality
• Algorithmic trading disconnected from fundamentals
• Loss of cache
7. The Public Markets – Drivers of Change:
• Sarbanes Oxley
• Decimalization
• Separation of investment banking and research
• Consolidation of boutique banks
• Longer pre-IPO gestation periods
8. Current Late Stage Market Overview:
• There is ~$21b invested in late stage deals per year
• Traditionally 30-50 funds participate in this market
• Companies require inexpensive access to growth
capital
• Companies require less board seat and operational
advice
9. Ideal Private Secondary Market Company:
• $100-$500m in market cap • Too small to go public
• $20m in revenues • Tech and Clean Tech sectors
• Approximately 5 years old
• Don’t have to be profitable
• Venture backed
• Over 100 shareholders
10. Testimonials:
“These companies I’m buying on the private
market are at the same stage as when I
used to buy them when they went public.
So why not buy them?” Business Insider,
January 2011
“We now believe Facebook could be worth
more than $200b in 2015” Wedbush, March
2011
11. The 4 Horsemen:
Company Date Funding Last Round Val Recent Rumored Val Revs 2011E P/S
Facebook Jan-11 $1.5b $50b $75b $4b 19x
Groupon Jan-11 $950m $4.8b $15b $2b 8x
Zynga Jun-10 $300m $4.5b $10b $2b 5x
Twitter Dec-10 $200m $3.7b $7b $140m 50x
Source: Company reports and Business Insider
12. Is There A Tech Bubble?
Large Cap Blue chip techs are cheap
Mid Cap Expansion stage growth, similar to late stage
Small Cap Completely ignored, no liquidity, getting worse
Late Stage A handful are valuations are extreme, similar to mid caps
Mid Stage Total VC AUM shrinkage decreases demand
Early Stage Companies seeking $3m+ getting decent valuation
Seed Stage Valuations have crept up from $2-3m to $3-4m pre
13. Changing VC Perceptions
Old:
• No one exits before we exit
• A future exit keeps the employees motivated
New:
• Employee liquidity helps retention & recruitment
• Secondary sales are a 3rd exit avenue after IPOs & M&A
• Can manage portfolio more efficiently
14. Private Markets are Institutionalizing:
2010: 90% of transactions were over-the-counter
2011: ~80% will be listed market transactions
• SecondMarket & Xpert Financial will be 100% listed
• SharesPost is registering as a broker-dealer
• Primary markets will be established
15. What is a “Listed” Private Market?
• Company and board approved
• Controlled sales
• Limited Selling Windows
• Market Creation
• Right of First Refusal
16. Comparison:
SecondMarket SharesPost Xpert Financial
• Launched April 2009 • Online Bulletin Board • 2 Years Old
• Broker-Dealer • 3rd Party Research • Broker-Dealer & SEC Reg ATS
• Over $500m transacted • Registered Specialists • Tim Draper- Chairman
• Diverse Alt Assets • 60,000 Members • Licensed Nov 2010
• 28 Reported Companies • 16,000 Accredited • Electronic Platforms
• 2010: OTC • Min Transaction: $25k • Full Level II Quotes
• 2011: Listed • Standardized Contracts • 8-9 Cos in Pipeline
• VC: FirstMark • Heavy Technology • RegD Rule 506 –Primary Share
• Pursuing BD License Sale License
• 2-5% fee both sides • Rule 144A – Qualified
Institutional Buyers
• Rule 144 – Accredited investors
- non-Affiliated sellers - pending
• Reverse Inquiry Basis
• Company approval
17. Notable Secondary Transactions:
Kleiner Perkins $38m in Facebook at $52b, Feb 2011
Andreesen Horowitz $80m in Twitter, Feb 2011
DST indirect secondary participant: Facebook,
Zynga, Groupon
Accel sold $516m Facebook to TCV (~$200m),
Andreesen Horowitz (~$80) and others at $35b, Nov 2010
Chris Sacca $400m in Twitter at $4.5b from Spark,
Union Square, and Ev Williams, Feb 2011
22. Types of Secondary Sales:
• Sr. Preferred – indirect for Common Shares
• Jr. Preferred – indirect for Common Shares
• Outright purchase of Common or Preferred
• Upside Sharing – buyer splits proceeds of future sale
• Escrowed Shares – earn-out incentive
• Loan for Shares – avoids ROFR, Co-Sale & Taxes
• Loan to Exercise Options
23. Types of Transactions:
• Modified Dutch Auction
•Minimum bid, clearing price => lowest bid that clears
• Fixed Price Auction
•Set price, all bids above minimum
• Bulletin Board
•Bidders are matched to sellers online
24. Considerations:
Transfer Restrictions
• Right of First Refusal (ROFR)
• Co-Sale
• Upfront waiver rights can be granted
Workarounds
• Loan for Shares avoids ROFR and Co-Sale
• Earn-outs deter Co-Sales
Contractual Rights
• Registration rights and preemptive rights are transferrable
• Require separate transfer agreement with the company
26. Two Primary SEC Regulatory Risks:
Special Purpose Vehicles designed to bypass the 500 investor rule
• Goldman Sachs’ US Facebook SPV was canceled
• Could give rise to parallel market of SPV
• Small SPVs charging 8% fees & 20% carried interest
•Shares post has completed 5 SPV auctions
•3% commission, 5% management fee, 3% distribution fee
•Cannot exit until IPO when Units convert to FB shares
Lack of Share Count, Cap Table, and Company Financials
• Even “sophisticated” investors need financials
• Significant amount of 3rd party data but little company data
• Listed markets resolve this issue
27. Additional Risks:
• Illiquidity
• Opacity
• Information Asymmetry
• Valuation
• Behavior of secondary investors
• Shift from options to RSUs
28. Future Listed Markets:
Companies will waive ROFR in exchange for:
• Employees sell no more than 10-15% of vested/owned positions
• Only employees with 4+ years can participate
Board approved potential investor list
• Investors adhere to the board’s guidelines
• Investor group receives audited financials
• Company has recourse if guidelines are violated
48. The VC industry has lagged the major benchmarks over the past 10 years:
10 years
Dow Jones 2.50%
S&P 500 -0.40%
Nasdaq -4.30%
US Venture Capital Index -4.60%
Cambridge Associates, Sept 2010
49. Due to “J-Curve” older funds should have higher TVPI but they don’t:
Total Value to Paid in Capital (TVPI)
1.4
1.2
1
0.8
0.6
0.4
0.2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Cambridge Associates, Sept 2010
50. As a result VC assets under management are falling:
Assets Under Management
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
NVCA, Jan 2011
51. And the total # of VC funds are falling:
Total # of VC Funds
2000
1800
1600
1400
1200
1000
800
600
400
200
0
NVCA, Jan 2011
52. But the total # of investments is steady:
Number of venture investments
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
NVCA, Jan 2011
53. And the total amount invested is steady:
Total Amount Invested
$120.00
$100.00
$80.00
$60.00
$40.00
$20.00
$0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
NVCA, Jan 2011
54. There have been so many deals but so few exits:
Exits as a % of Total Deals
16%
14%
12%
10%
8%
6%
4%
2%
0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
NVCA, Jan 2011
56. The median age at IPO has risen from 6 to 10 years:
Median Age at IPO
12
10
8
6
4
2
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
NVCA, Jan 2011
57. Private Secondary Markets are a new exit option:
Transaction $ Amount
$180,000,000
$160,000,000
$140,000,000
$120,000,000
$100,000,000
$80,000,000
$60,000,000
$40,000,000
$20,000,000
$0
1Q10 2Q10 3Q10 4Q10
SecondMarket, Feb 2011
58. What happens next?
Secondary markets institutionalize changing the industry:
• Many more companies adopt policies and platforms
• SEC introduces regulation that enhances the market
• IPOs get pushed out further and bypassed entirely in some instance
• Stronger companies emerge as a result of longer gestation period
The lines blur between late stage venture funds and hedge funds
• Late stage funds reduce lockups from 10 years to 2 years to adjust for liquidity
• Hedge funds allocate 20%-40% to less liquid secondary markets
•Balanced with market neutral public markets
• Massive amounts of capital flow into this new asset class
59. Thank You
Jason M. Jones
jjones@highstepcap.com
914-315-9751
Follow me on Twitter: @cardinalrose
Profile on Google: /profiles.google.com/jjones1/
