New Forms of Private-Company Liquidity: Regulate or Orchestrate?

An oft-noted reason for lackluster venture returns is the lack of liquidity for private companies backed by venture capital.  For all kinds of reasons — regulatory, structural, madness-of-crowds — the IPO market for venture-backed startups has been essentially shut down for years.  Which means:

  • Valuations for companies that do exit are depressed becuase M&A buyers know there is not alternative
  • Companies need more capital to get to liquidity, which focuses investors on “certified” mega-hits rather than a broader range of innovation
  • Backers of venture capital firms shift their assets to less innovative but more lucrative asset classes, including (depressed) public stocks.

In the last two or three years a new form of liquidity for private companies has emerged, principally in the form of online marketplaces for private companies.  These companies — such as SharesPost and SecondMarket — are handling increasing volumes of transactions and, as importantly, providing another form of liquidity for private companies and their investors.  See the Q&A in Quora for some opinions about the scope and efficacy of these new media.

There are some ticklish regulatory issues with these exchanges, having to do with the gray area between a broadly-traded private company and a public company.  And there are numerous points of misalignment between shareholders, management teams, and individual (usually employee) investors in private companies whose shares may trade on these exchanges.

But a new form of liquidity is probably good news for innovation.  What do you think?

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About the author

an Gordon is Research Director for Valhalla Partners, a Northern Virginia venture capital firm. Dan has twenty-eight years experience working with technology, as a computer scientist, software developer, manager, analyst, and entrepreneur. Prior to joining Valhalla Partners, Dan was a Director and senior staff member at the PricewaterhouseCoopers Global Technology Centre, analyzing technology trends and consulting on technology-oriented strategies in the software, e-business, wireless, optical, networking, semiconductor IP, and life sciences arenas. He worked with clients from North America, Europe, the Middle East, and Australia. Dan was a Contributing Writer and Contributing Editor to the Technology Centre’s annual Technology Forecast, and a frequent speaker at industry and general business meetings. Before joining PwC, Dan spent 20 years in Silicon Valley as a software technologist, manager, director, and entrepreneur, including senior technical roles at well-known Silicon Valley firms like Symantec, Intuit, and Oracle. Dan has also been involved in startup companies in the applied Artificial Intelligence and Web applications fields. Dan has a B.A. (cum laude) from Harvard University and an M.S. from New York University in Computer Science. He is a Professional Member of the IEEE and ACM. Dan lives in Washington, D.C. with his wife and two children.