As I discussed in my last post, numerous systemic changes have caused the U.S. public stock markets to no longer support our country's growth-stage companies. These changes have created nearly a 10-year timeframe before a U.S. startup can successfully go public, a timeline that is not sustainable and could negatively affect job creation, innovation and American global competitiveness. A new growth market must emerge, and I believe that SecondMarket can be that solution.
Part Two - The Present
I founded SecondMarket in late 2004 as the first centralized marketplace for alternative investments. We initially dealt with restricted securities in public companies and eventually expanded into other alternative investments. For instance, we helped retirees get liquidity when the market for auction-rate securities froze up and the holders were left with long-term, illiquid investments. We have been part of the sales syndicate working in conjunction with Deutsche Bank to help the U.S. Treasury sell TARP warrants. We have also facilitated transactions of bankruptcy claims, fixed income products and, most recently, private company stock.
Before we officially launched the private company stock market in April 2009, we conducted several months of due diligence and spoke with numerous entrepreneurs, CEOs, venture capitalists, and thought leaders in the space to see whether this was a viable market. We found that the public markets were irrevocably broken and there was a need for interim liquidity for startup shareholders as companies stayed private for nearly twice as long as in prior years. The public stock markets historically catered to companies of all sizes, but the paradigm shifted in the last decade. Today, only the largest companies (typically with market caps in excess of $1B) are able to successfully navigate the public markets, and smaller companies must pursue alternative options. We believe SecondMarket can help to fill that role, by operating as a bridge to an IPO for companies that are trying to grow large enough to go public, or as an alternative option for companies that wish to remain private.
The SecondMarket approach is premised on the notion that there is not a "one-size-fits-all" model for private companies. Each company has its own goals and objectives. Some companies value control and flexibility, and others are more concerned with liquidity and valuation. We allow the companies to dictate the essential elements of their marketplace when designing a liquidity program on SecondMarket, such as identifying eligible buyers and sellers, setting the amount of shares to be sold, and determining the frequency of transactions. Some startups only want former employees to sell, and some only want existing shareholders to buy. Some permit weekly trading, but many prefer to establish quarterly or annual liquidity events. Some choose to allow an open market where buyers and sellers negotiate the share price on a one-off basis, and some elect to run an auction.
When a company elects to establish a liquidity program on SecondMarket, we require the company to provide financial disclosures to eligible buyers and sellers, including audited financials, company by-laws and capitalization tables. Companies are increasingly comfortable with the mechanics of our market as they recognize that information they provide is only available to the companies' selected buyers and sellers. Startups have numerous reasons to set up a liquidity program, and can use SecondMarket as a tool to provide interim liquidity to their shareholders, attract and retain employees, and consolidate their shareholder base.
We are frequently asked how a startup knows when the time is right to leverage the private company stock market. Although there is no clear-cut formula, certain indicators, such as number of shareholders, the age of the startup, and market traction can be utilized. For example, SecondMarket generally works with four or five year-old startups with significant market traction and annual revenues of at least $20 million. The startups' shareholder bases generally have reached the scale where shareholders' interests start to diverge (approximately 100 shareholders), and the startups usually have VCs on their board.
SecondMarket has truly emerged as a solution provider for private companies. In 2008, we completed $30 million in private company transactions. In 2009, that number rose to $100 million and in 2010, we saw a nearly four-fold increase in transactional value. To date, we have completed a cumulative total of over $750 million in private company stock transactions. But most importantly, we have helped over 50 private companies provide liquidity for their shareholders, many of whom have reinvested their money into other startups.
Moreover, earlier this year we unveiled a new online platform that introduced aspects of social media into the alternative investing universe. In addition to enabling SecondMarket participants to create personalized profiles and discover unique investment opportunities, the new platform also greatly expanded our private company database to thousands of startups around the world.
Ultimately, I firmly believe that the U.S. is still the best place for entrepreneurs to create the next revolutionary companies. In this period of slow economic growth and increasing global competitiveness, we need to fully support entrepreneurship in this country. It is also imperative to analyze various rules and regulations to ensure that they are updated to reflect the new realities of market structure, technology and information flow to better support thousands of innovative, growth-stage companies. In my final post in this series, I will address certain regulatory changes that should be made to support our country's growing private companies on their road to the public markets and the impact these changes could have on job growth and America's future as a global competitive player. Stay tuned...