Private Company Marketplaces

Facebook and Twitter are just the beginning

@cardinalrose

Table of Contents

Market Overview

Deal Mechanics

Completing a Transaction

Appendix

2

Private Company Marketplaces

Private company marketplaces will solve

the liquidity problems for employees and

board members while also providing

inexpensive access to growth capital

3

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

4

My Prediction

Private company marketplaces institutionalize changing the industry:

• Many companies institute alternative liquidity programs

• The majority of these programs are on listed private marketplaces

• SEC introduces regulation that strengthens the market

• IPOs get pushed out further expanding the late stage market

• Stronger companies emerge as a result of longer gestation period

• Marketplaces experience rapid growth replacing antiquated private placements

The lines blur between late stage venture funds and hedge funds

• Late stage funds reduce lockups from 10 years to 5 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

5

The IPO – Pros & Cons

Pros:

• Gain liquidity for shareholders

• Gain access to growth capital

Cons:

• Sarbanes Oxley

• Headaches, regulation & compliance

• Exposure to class action legal risks

• Wall Street disconnect

• Short term trader mentality

• Algorithmic trading disconnected from fundamentals

• Loss of cache

6

The Public Markets – Drivers of Change:

• Sarbanes Oxley

• Trading decimalization

• Separation of investment banking and research

• Consolidation of boutique banks

• Longer pre-IPO gestation periods

7

Current Late Stage Market Overview:

• There is ~$21b invested in late stage deals per year

• Traditionally 30-50 funds participate in this market

• Private marketplaces completed $500m in 2010

• The private marketplace industry will grow to $10b within 10 years, possibly sooner

8

Ideal Private Secondary Market Company:

• $100-$500m in market cap

• $20m in revenues

• Approximately 5 years old

• Don’t have to be profitable

• Venture backed

• Over 100 shareholders

• Too small to go public

• Tech and Clean Tech sectors

• Could expand to private equity deals

9

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

10

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 50xSource: Company reports and Business Insider

11

Is There A Tech Bubble?

Valuations have crept up from $2-3m to $3-4m pre

Blue chip techs are cheap

Expansion stage growth, similar to late stage

Completely ignored, no liquidity, getting worse

A handful are valuations are extreme, similar to mid caps

Total VC AUM shrinkage decreases demand

Companies seeking $3m+ getting decent valuation

Seed Stage

Early Stage

Mid Stage

Late Stage

Small Cap

Mid Cap

Large Cap

12

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

• Alternative liquidity programs must be established

13

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

14

What is a “Listed” Private Market?

• Company and board approved

• Controlled sales

• Limited Selling Windows

• Market Creation

• Right of First Refusal

15

Comparison:

SecondMarket• Launched April 2009

• Broker-Dealer

• Over $500m transacted

• Diverse Alt Assets

• 28 Reported Companies

• 2010: OTC

• 2011: Listed

• VC: FirstMark

SharesPost• Online Bulletin Board

• 3rd Party Research

• Registered Specialists

• 60,000 Members

• 16,000 Accredited

• Min Transaction: $25k

• Standardized Contracts

• Heavy Technology

• Pursuing BD License

• 2-5% fee both sides

Xpert Financial• 2 Years Old

• Broker-Dealer & SEC Reg ATS

• Tim Draper- Chairman

• Licensed Nov 2010

• Electronic Platforms

• Full Level II Quotes

• 8-9 Cos in Pipeline

• RegD Rule 506 –Primary Share

Sale License

• Rule 144A – Qualified

Institutional Buyers

• Rule 144 – Accredited investors

- non-Affiliated sellers - pending

• Reverse Inquiry Basis

• Company approval

16

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

17

Deal Mechanics

18

3 Parties in a Secondary Transaction:

• Buyer

• Seller

• Company

- Right of First Refusal

- Co-Sale Rights

19

Types of Buyers:

• Existing VC Investors

• VC Funds that lost primary round

• Fund-less Sponsors/Special Purpose Vehicles

• Participants in Secondary Markets

• Endowments, Pension Funds, HNW, Sovereign Wealth, Insurance, Private Equity

• Direct Secondary Funds

• Late Stage Venture Funds

• Mutual Funds & Hedge Funds - Public Market Investors

20

Types of Sellers:

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ex-Employees Employees Investors/Other

1Q10

2Q10

3Q10

4Q10

Source: SecondMarket

21

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

22

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

23

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

24

Risks:

25

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

26

Additional Risks:

• Illiquidity

• Opacity

• Information Asymmetry

• Valuation

• Behavior of secondary investors

• Shift from options to RSUs

27

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

28

Completing the Transaction

29

Private Company Secondary Markets:

30

SharesPost example:

31

Current Active Trades on SharesPost:

32

SharesPost Order Entry:

33

SharesPost Order Confirmation:

34

SharesPost Bid/Ask Page:

35

Yelp! Company Registration:

36

NeXt Up Research: Yelp! Key Metrics:

37

NeXt Up Research: Yelp! Valuation:

38

NeXt Up Research: Yelp! Lead Investors:

39

Appendix

40

Companies Traded on SecondMarket:

41

Facebook Price Chart:

$0.00

$10.00

$20.00

$30.00

$40.00

$50.00

$60.00

$70.00$33.00 4/1/2011

$33.00 4/1/2011

$35.00 3/29/2011

$35.00 3/17/2011

$33.00 3/11/2011

$33.00 3/11/2011

$37.00 2/18/2011

$30.00 2/14/2011

$31.00 2/11/2011

$31.00 2/7/2011

$32.50 2/3/2011

$35.00 2/2/2011

$35.00 2/2/2011

$35.00 1/26/2011

$35.00 1/19/2011

$60.00 1/19/2011

$51.00 1/19/2011

$40.00 1/19/2011

$27.60 1/19/2011

$60.00 1/18/2011

$40.00 1/18/2011

$45.00 1/18/2011

$50.00 1/17/2011

$45.00 1/16/2011

$50.00 1/15/2011

$45.00 1/14/2011

$48.00 1/14/2011

$66.00 1/13/2011

$50.00 1/13/2011

$46.00 1/12/2011

$45.00 1/12/2011

$50.00 1/11/2011

$55.00 1/11/2011

$50.00 1/11/2011

$55.00 1/11/2011

$35.00 1/10/2011

$40.00 1/7/2011

$55.00 1/6/2011

$25.00 11/30/2010

$25.00 11/24/2010

$20.00 11/22/2010

$15.20 11/9/2010

$20.00 11/4/2010

$15.20 11/2/2010

$25.00 10/19/2010

$14.40 8/31/2010

$15.00 8/31/2010

$15.00 8/30/2010

$15.00 8/10/2010

$15.20 8/5/2010

$12.00 7/27/2010

$14.00 6/25/2010

$13.50 6/24/2010

$12.60 6/21/2010

$10.00 4/26/2010

$5.40 12/4/2009

$2.40SharesPost

42

3rd Party Research:

• Wedbush Securities

• Liquid Scenarios

• VC Experts

• Research 2.0

• Blueshift Research

• GigaOm

• Crystal Research Associates

• NextUp Research

• Arcstone Partners

• CB Insights

• Greencrest Capital

• PrivCo

• Majestic/ITG

43

Largest VC Backed Deals in 2010:

1 Better Place Clean Tech Expansion $350,000,300

2 Twitter Internet Expansion $200,000,000

3 BrightSource Energy Clean Tech Later Stage $150,000,000

4 Abound Solar Clean Tech Expansion $111,000,000

5 Trilliant Telecommunications Later Stage $105,999,800

6 Elevance Renewable Sciences Clean Tech Expansion $100,000,000

7 HighTower Holdings Financial Services Expansion $99,999,900

8 Casa Systems Internet Infrastructure Later Stage $96,460,000

9 Pierpont Securities Financial Services Expansion $84,999,900

10 Fisker Automotive Clean Tech Later Stage $78,078,900

44

IPO Pipeline:

Date Name Ticker Description IPO size 2010 Revs

7/14/2010 AMC Entertainment AMC Movie Theaters $450m $2417m

3/11/2011 HomeAway AWAY Online Real Estate Rentals $230m $168m

3/15/2011 Qihoo 360 QIHO Chinese Online Security $200m $58m

2/27/2011 LinkedIn Business Social Network $175m $161m 9 months

9/29/2009 NewEgg.com EGGZ Electronic Ecommerce $175m $2100m 2008

2/28/2011 Skullcandy SKUL Electronic Accessories $125m $140m estimated

11/9/2010 Tudou TUDO Chinese Online Video $120m $34m 9 months

2/11/2011 Pandora Online Music $100m $55m FYJan11

8/9/2010 Skype Online Telephony $100m $406m 6 months

12/23/2010 Responsys MKTG Email Marketing $60m $85m

11/17/2010 Kayak KYAK Online Travel $50m $128m 9 months

2/10/2010 Gamefly GFLY Online Video Game Rentals $50m $98m FYMar10

45

Relevant 2010 IPOs:

Name Ticker Performance

Epocrates EPOC 44%

Demand Media DMD 24%

Neilson Holdings NLSN 17%

Sky-Mobi YSM -33%

Dangdang DANG 69%

Youku.com YOKU 174%

Bitauto BITA -26%

Mecox Lane MCOX -33%

MakeMyTrip MMYT 86%

GreenDot GDOT 20%

RealID RLD 49%

Tesla TSLA 31%

Vringo VRNG -41%

Motricity MOTR 55%

ReachLocal RLOC 59%

TeleNav TNAV 39%

Convio CNVO 32%

Quinstreet QNST 51%

Average 34%

46

VC Market in Graphs

47

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

48

Due to “J-Curve” older funds should have higher TVPI but they don’t:

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total Value to Paid in Capital (TVPI)

Cambridge Associates, Sept 2010

49

As a result VC assets under management are falling:

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Assets Under Management

NVCA, Jan 2011

50

And the total # of VC funds are falling:

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Total # of VC Funds

NVCA, Jan 2011

51

But the total # of investments is steady:

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Number of venture investments

NVCA, Jan 2011

52

And the total amount invested is steady:

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total Amount Invested

NVCA, Jan 2011

53

There have been so many deals but so few exits:

0%

2%

4%

6%

8%

10%

12%

14%

16%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Exits as a % of Total Deals

NVCA, Jan 2011

54

IPOs have dried up:

0

50

100

150

200

250

300

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

IPO exits

NVCA, Jan 2011

55

The median age at IPO has risen from 6 to 10 years:

0

2

4

6

8

10

12

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Median Age at IPO

NVCA, Jan 2011

56

Private Secondary Markets are a new exit option:

$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$160,000,000

$180,000,000

1Q10 2Q10 3Q10 4Q10

Transaction $ Amount

SecondMarket, Feb 2011

57

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

58

Thank You

Jason M. Jones

jjones@highstepcap.com

914-315-9751

Follow me on Twitter: @cardinalrose

Profile on Google: /profiles.google.com/jjones1