Are Secondary Private Offerings and Facilitators like Second Market Changing the IPO Game?
Over the last few months, three technology darlings, Facebook, Zynga and Yelp, have closed deals with venture capital funds that included both an investment in new shares and also the acquisition of existing shares from employees and other major stockholders. The secondary piece of those deals is somewhat unique because it gives those employees or stockholders the opportunity to liquidate some or all of their equity positions without the company filing for its initial public offering. Illiquid securities sales facilitators like SecondMarket are also providing the opportunity for early liquidity by matching equity holders in venture-backed companies with willing buyers outside of the public markets.
The question, of course, is whether this new trend in venture capital investing or the emergence of SecondMarket is going to radically change the IPO market.
If by radically change, we are talking about reducing the numbers of offerings by elite technology companies, I'm not sure that anything can really move the needle significantly compared to the last two years when technology IPOs were about as common as Bigfoot sightings. The fact remains, though, that employees often choose to join hot venture-backed companies and take annual base salaries below the current market in exchange for the dream of a quick infusion of cash thanks to an IPO or acquisition. The market meltdown in late 2008 has dramatically affected the personal finances of those individuals, who are now forced to hold on to what has traditionally been illiquid stock for far longer than they would like. The lack of exits certainly has hurt venture-backed companies attracting rock-star employees. But the emergence of secondary pieces to late stage venture capital investments and facilitators like SecondMarket helps solve that problem. It also dramatically reduces the pressure on a company's board of directors to take a company public.
As a result, I think that hot technology companies will now wait until there is a compelling reason to begin the IPO process. IPOs have always been expensive transactions to consummate, both from a dilution standpoint and also in terms of legal and accounting fees. But the maintenance fees for public companies weren't that big of a deal, until Sarbanes Oxley came along and completely changed the game on operating as a public company from a cost perspective. And that change certainly wasn't to the benefit of companies, though the protections add a good layer of protection for stockholders of listed companies. Thus, companies haven't been rushing to the IPO gates like in the pre-SOX days, and the emergence of the new liquidation avenues discussed above will only slow that race even more.
Nevertheless, I don't think that either secondary pieces to venture investments or illiquid securities sales facilitators will completely derail the need for companies to go public. Indeed, both VCs and facilitators need robust exits for their strategies to continue to work, which is why these liquidity strategies aren't implemented in very young companies, opting instead to work with startups that have been around for several years and look like excellent IPO or acquisition candidates. If anything, I think that the market for exits will be more robust, maybe not in terms of numbers of deals but in terms of quality of deals, as a result of these new liquidity strategies.
