private company secondary markets october 2011

October 2011

Private Company Secondary Markets

Copyright 2011 HighStep Capital. All rights reserved.

Builders Fund Private Markets Liquidity

Innovators Fund Long/Short Equity

• Public markets fund

• Global Internet companies

• Market neutral - up to 200% gross

• Low beta and low volatility

• Private market fund

• Global Internet companies

• Solve cap table and liquidity needs

• Access to the top venture backed

companies


Characteristics of a Secondary Investor

Investors not operators

Passive approach – no board seats

Typically more analytical – love data

Mid-cycle investors

Patient investors

Equivalent to investing in a small cap company


Secondary Investors are Not Venture Capitalists

We solve liquidity problems for shareholders.

VCs buy shares in emerging business.

We buy shares from shareholders…

Dodd-Frank: 20% non-qualifying rule


Time to Exit has Increased

0

2

4

6

8

10

12

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Median Age at IPO

NVCA, Jan 2011


Why Companies Mature Before an IPO

Sales # of IPOs Avg 1st Day Return Avg 3yr Return

<$50m 3,897 23.60% 5.00%

$50m+ 3,457 12.00% 39.10%

http://bear.cba.ufl.edu/ritter

IPO research from Prof. Jay Ritter, University of Florida – as of 6/1/11

IPO performance from 1980-2010


The IPO Gap is Widening

Private company secondary funds are the new small cap funds

1 2 3 4 5 6 7 8 9 10

Public

Markets VC

Environment in 1990s

IPO

1 2 3 4 5 6 7 8 9 10

VC IPO Gap

Private

Secondary

Exchanges

Public

Markets

Today’s Environment


Secondary Investors Relieve the Pressure Cooker

• Employee’s cash constraints

• Investor Fatigue

• VC fund life

• 500 shareholder limit


My Market Predictions

• IPO Gap widens

• More mature companies enter the public markets

• SEC regulation strengthens the market

• Many companies adopt liquidity programs

• Private secondary offerings emerge as a third exit

alternative behind IPO and M&A


My Fund Predictions

• Venture capital & angels get their 5 year

investment cycle back

• Hedge funds & Mutual funds move in

• Private Equity/LBO firms offer their shares

• Private Market Liquidity Funds emerge as a new

asset class


Marketplaces have Been Established

SecondMarket

• Largest and best known

• Broker/Dealer

• Over $800mm

transacted

GATE Technologies

• Broker/Dealer

• Electronic trading

platform

SharesPost

• Online bulletin board

• Widest range of companies

• Min transaction: $25k

Xpert Financial

• Broker/Dealer

• Electronic trading platform

• Company Pre-Approval

• Backed by Tim Draper


Sample of Companies Traded


Evolution of the Markets

•Trading Facebook is like the Wild West

•Crowdsourcing about to go on steroids

•Companies will get organized


How To Buy Facebook Shares



• Step 1: Buyer decides to buy Facebook shares

• Step 2: buyer hires B/D as a buyer agent

• Step 3: buyer agent puts word into B/D cloud

• Step 4: Engineer hires a private wealth manager

• Step 5: PWM hires lawyer or B/D as seller agent

• Step 6: seller agent puts word into B/D cloud



• Buyer: Non-binding Letter of Intent: shares, price,

buyer

• Seller: returns an Expression of Sale: price is binding

• Buyer: produces a proof of funds

• Seller: produces a proof of shares

• Seller’s attorney: arranges escrow & produces a

stock transfer agreement

• Signatures: both parties sign & date

• Seller’s attorney: delivers STA to Facebook for RoFR

• Closure: RoFR waived, shares & $$ are exchanged


Phase 1 = Wild West

B/D Economics: $250m / $32 = 7.8m shares * (4% com * $32) = $10m


Crowdsourcing – Kickstarter is cool


Pabst Blue Ribbon - Crowdsourcing on Steroids

Goal: raise $300m to buy Pabst Blue Ribbon

$5: Bottle Membership

$25: Six Pack Membership

$100: Case Membership

$250k: The BrewMeister


Company Liquidity Programs are the Solution

• A shareholder selling plan initiated by the company

with board approval

• Buyers are pre-approved

• Minimum investment sizes are established

• Employee sales policies are established

• Regular sales windows are established

• Select financials are disclosed with pre-approved

buyers under NDA

• Organized access to management & ongoing

reporting


CLP Example

Airbnb, Investor Chamath Palihapitiya Settle

Differences; Employees Will Get Liquidity

AllThingsD – October 2, 2011

New York | San Francisco

Jason Jones

[email protected]

914.315-9751

private company secondary markets october 2011

Economy & Finance

highstep capital

ipo ipo performance

liquidity problems

secondary investorinvestors

secondary investors

day return avg

low beta

ipos avg