SecondMarket, the secondary market (it’s a well-named site, at least) for shares of private companies, is going to be tested by one of the major companies it provides liquidity to when that company goes public.
Two big events are going on right now for SecondMarket: First, they released their Q3 numbers, and they are growing significantly. The number of participants is up to over 75,000, a 333% growth from last year. The company has conducted $435 million worth of transactions this year, a 75% increase from last year. As they noted on their blog (first link above), the company is conducting “liquidity programs” for many companies at sizes that, in the past, would have likely necessitated an IPO. They also released some descriptive statistics on the people behind the transactions themselves – the sellers of the securities are overwhelmingly ex-employees (64.5%) or current employees (16.9%), and the buyers are overwhelmingly private individuals (63% of the cash spent). The top companies purchased were Facebook, Twitter, and Groupon, in that order.
Second, Groupon is looking like they will actually go ahead with their eternally-delayed IPO, and it’s being guesstimated at a price of $16-18 per share. Comparing it to the big IPOs of this summer (Pandora and LinkedIn) seem to sugest that’s a reasonable range, if you are a fan of young companies with unproven economics (no judgment intended there – many investors apparently are). Problem is, shares on SecondMarket (and SharesPost, a similar site) have traded at an implied valuation of $20-30 billion, whereas the IPO looks to value the company at far less. For reference, I’ve heard of Groupon stock selling on SecondMarket for as much as $60 a share. That’s a pretty big gap for holders of the stock on these secondary markets, who look like they stand to lose more than 70% of the value they paid for just weeks ago.
There are a ton of interesting issues raised by the existence of SecondMarket in the first place (isn’t it clear that SecondMarket supports a speculative bubble if the valuation of a major company traded on the market is inflated by as much as 70% per share? isn’t selling shares at a massively inflated rate to a majority consisting of private individuals the definition of subprime?), but this should challenge the business model as a whole. If we see the other 3 major companies on the exchange (Facebook, Twitter, and Zynga) go public to similarly deflated valuations (compared to the valuations on SecondMarket and SharesPost), then we may see individual investors losing and subsequently pulling back from the private company market entirely. I’d guess Zynga is the next to go, and maybe if investors on SecondMarket believe that Groupon’s IPO is a representative of how Zynga’s IPO might go, we may see shares fall in price as a result.
danielmarkmiller.net 