private company secondary markets october 2011
TRANSCRIPT
October 2011
Private Company Secondary Markets
Copyright 2011 HighStep Capital. All rights reserved.
Builders Fund Private Markets Liquidity
Innovators Fund Long/Short Equity
• Public markets fund
• Global Internet companies
• Market neutral - up to 200% gross
• Low beta and low volatility
• Private market fund
• Global Internet companies
• Solve cap table and liquidity needs
• Access to the top venture backed
companies
Copyright 2011 HighStep Capital. All rights reserved.
Characteristics of a Secondary Investor
Investors not operators
Passive approach – no board seats
Typically more analytical – love data
Mid-cycle investors
Patient investors
Equivalent to investing in a small cap company
Copyright 2011 HighStep Capital. All rights reserved.
Secondary Investors are Not Venture Capitalists
We solve liquidity problems for shareholders.
VCs buy shares in emerging business.
We buy shares from shareholders…
Dodd-Frank: 20% non-qualifying rule
Copyright 2011 HighStep Capital. All rights reserved.
Time to Exit has Increased
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
Copyright 2011 HighStep Capital. All rights reserved.
Why Companies Mature Before an IPO
Sales # of IPOs Avg 1st Day Return Avg 3yr Return
<$50m 3,897 23.60% 5.00%
$50m+ 3,457 12.00% 39.10%
http://bear.cba.ufl.edu/ritter
IPO research from Prof. Jay Ritter, University of Florida – as of 6/1/11
IPO performance from 1980-2010
Copyright 2011 HighStep Capital. All rights reserved.
The IPO Gap is Widening
Private company secondary funds are the new small cap funds
1 2 3 4 5 6 7 8 9 10
Public
Markets VC
Environment in 1990s
IPO
1 2 3 4 5 6 7 8 9 10
VC IPO Gap
Private
Secondary
Exchanges
Public
Markets
Today’s Environment
Copyright 2011 HighStep Capital. All rights reserved.
Secondary Investors Relieve the Pressure Cooker
• Employee’s cash constraints
• Investor Fatigue
• VC fund life
• 500 shareholder limit
Copyright 2011 HighStep Capital. All rights reserved.
My Market Predictions
• IPO Gap widens
• More mature companies enter the public markets
• SEC regulation strengthens the market
• Many companies adopt liquidity programs
• Private secondary offerings emerge as a third exit
alternative behind IPO and M&A
Copyright 2011 HighStep Capital. All rights reserved.
My Fund Predictions
• Venture capital & angels get their 5 year
investment cycle back
• Hedge funds & Mutual funds move in
• Private Equity/LBO firms offer their shares
• Private Market Liquidity Funds emerge as a new
asset class
Copyright 2011 HighStep Capital. All rights reserved.
Marketplaces have Been Established
SecondMarket
• Largest and best known
• Broker/Dealer
• Over $800mm
transacted
GATE Technologies
• Broker/Dealer
• Electronic trading
platform
SharesPost
• Online bulletin board
• Widest range of companies
• Min transaction: $25k
Xpert Financial
• Broker/Dealer
• Electronic trading platform
• Company Pre-Approval
• Backed by Tim Draper
Copyright 2011 HighStep Capital. All rights reserved.
Sample of Companies Traded
Copyright 2011 HighStep Capital. All rights reserved.
Evolution of the Markets
•Trading Facebook is like the Wild West
•Crowdsourcing about to go on steroids
•Companies will get organized
Copyright 2011 HighStep Capital. All rights reserved.
How To Buy Facebook Shares
Copyright 2011 HighStep Capital. All rights reserved.
How To Buy Facebook Shares
• Step 1: Buyer decides to buy Facebook shares
• Step 2: buyer hires B/D as a buyer agent
• Step 3: buyer agent puts word into B/D cloud
• Step 4: Engineer hires a private wealth manager
• Step 5: PWM hires lawyer or B/D as seller agent
• Step 6: seller agent puts word into B/D cloud
Copyright 2011 HighStep Capital. All rights reserved.
How To Buy Facebook Shares
• Buyer: Non-binding Letter of Intent: shares, price,
buyer
• Seller: returns an Expression of Sale: price is binding
• Buyer: produces a proof of funds
• Seller: produces a proof of shares
• Seller’s attorney: arranges escrow & produces a
stock transfer agreement
• Signatures: both parties sign & date
• Seller’s attorney: delivers STA to Facebook for RoFR
• Closure: RoFR waived, shares & $$ are exchanged
Copyright 2011 HighStep Capital. All rights reserved.
Phase 1 = Wild West
B/D Economics: $250m / $32 = 7.8m shares * (4% com * $32) = $10m
Copyright 2011 HighStep Capital. All rights reserved.
Crowdsourcing – Kickstarter is cool
Copyright 2011 HighStep Capital. All rights reserved.
Pabst Blue Ribbon - Crowdsourcing on Steroids
Goal: raise $300m to buy Pabst Blue Ribbon
$5: Bottle Membership
$25: Six Pack Membership
$100: Case Membership
$250k: The BrewMeister
Copyright 2011 HighStep Capital. All rights reserved.
Company Liquidity Programs are the Solution
• A shareholder selling plan initiated by the company
with board approval
• Buyers are pre-approved
• Minimum investment sizes are established
• Employee sales policies are established
• Regular sales windows are established
• Select financials are disclosed with pre-approved
buyers under NDA
• Organized access to management & ongoing
reporting
Copyright 2011 HighStep Capital. All rights reserved.
CLP Example
Airbnb, Investor Chamath Palihapitiya Settle
Differences; Employees Will Get Liquidity
AllThingsD – October 2, 2011