Tuesday, January 17, 2012

Reinventing stock market for startups.

Turmoil in the financial industry and continuing woes of the European banking system reduce investors' appetite for risk.  As a result, demand for stocks in the US is falling, which in turn prompts companies flash with cash prop up their own shares with buybacks (see Bloomberg quote below). In the current investment climate, startups and VCs are in a poor position because successful IPOs are few and far between. 
SecondMarket wants to solve the problem by providing a stock exchange for shares in small private companies that can't make it to IPO (see VBeat quote below).

Jan. 17, 2012. Bloomberg -- Stocks are getting scarcer in the U.S. for the first time since the bull market began as companies cut share sales to the lowest level since 2006 and buy back equity at the fastest pace in four years.

Jan 17, 2012. VBeat -- ...a re-invention of the small-cap IPO that might be music to the ears of venture capital funds backing tech companies. It now takes an average of 10 years to get a company to IPO, and there are fewer and fewer going public below the $1 billion mark. SecondMarket aims to be a third-route venture backed startups could pursue for an exit if IPO and M&A don’t make sense.
“We want to create a market where anyone who is a 20 percent holder of a company with a valuation of $150 million or more can get liquidity on their investment within two years,” replied Silbert.
The good news for SecondMarket is that NASDAQ used the same strategy to build a thriving exchange for small caps beginning in 1971. Maybe it's not a coincidence that creation of NASDAQ happened in between two recessions 1969-1970 and 73-75, when small companies faced liquidity issues similar to the today's situation.

tags: finance, problem, solution, economics, 10X

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