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?