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Are Secondary Markets Here to Stay?

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November 8, 2012

Last week we reported E&Y’s extensive research on the current, apparently, high price tag for an IPO. A healthy and accessible IPO market is important for PE exits, and of course, for the growth of companies of all kinds.

 

This week a high profile VC investor in the US presented his view of  one answer to E&Y’s findings. In a Venture Capital Dispatch (Dow Jones) interview, Tim Draper explains his views on the need for secondary markets as opposed to – or complementary with – more highly regulated exchanges for capital raising and investor liquidity.

 

Their emergence is no doubt part of a bigger trend towards greater use of online processes and tools in the PE industry, so we selected it for a highlight this week.

 

Xpert Financial, one of the electronic secondary markets that started up to compete with the higher profile SecondMarket, is currently “retrenching” after gaining some traction on the back of the Facebook IPO. Some of its key execs are moving to a new startup, CapRally that aims to automate individual portfolio company fundraising.

 

Draper is the backer of both companies. He says that Xpert Financial [and by extension all secondary markets] have a “huge” market and are able to relieve major “pain points” around capital raising and liquidity. He said that the regulatory landscape is shifting in their favor, such as the JOBS act, which is expected to grow the market for such exchanges.

Xpert is now trying to form a consortium of six to eight of the top VCs to become members, just as groups became members of the NYSE in its early days, says Draper. His pitch for CapRally is that it offers an online system for deal flow management. The offer is compelling, he said, because it helps with sourcing dealflow and sourcing investors by managing the relationships.

 

“I think it can actually help me with all my fundraising for all my portfolio companies,” said Draper. (Image source: secondmarket.com)

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