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Technology startup valuations are soaring as companies choose to stay private longer. Companies like SecondMarket address the liquidity problem for shareholders of private companies. But, should an average investor be investing in these “unicorns”?
Big names like Dropbox and Snapchat have witnessed investors devaluing their stake in the company this past month. With the announcement that Nasdaq has acquired SecondMarket and is expanding its private market solutions, should investors be running toward unicorns?
Nasdaq Acquires SecondMarket
SecondMarket was a pioneer in the secondary-market for private company shares. Its business has continued to evolve since it was founded in 2004.
The company began by developing a platform to trade Facebook (NASDAQ: FB) shares. Once Facebook went public, SecondMarket changed its focus and began facilitating company-sponsored transactions rather than one-off trades.
SecondMarket has facilitated the exchange of shares for private companies like DocuSign, Pinterest and Shazam.
Earlier this month Nasdaq Private Market announced that it would combine forces with SecondMarket Solutions. Terms of the acquisition were not disclosed.
While Nasdaq Private Market began as a joint venture with SharesPost, Nasdaq now has full ownership of Nasdaq Private Market.
One of the core markets that SecondMarket helps are the employees of these startups with stock options when they need liquidity. Nasdaq Private Market pitches to companies that if employees are given the option to sell shares, it will help these startups attract and retain the best talent.
Typically it is in the interest of the employees to hold their options until the IPO when the stock price usually surges, but for individuals that may want to buy a home or another large purchase, they may need to sell shares beforehand.
But, who then buys these hard-to-sell shares?
A Unicorn or ‘Unicorpse’?
While many criticize the decision to stay private longer, Nasdaq CEO Bob Geifeld backs the decision for many companies. He stated that companies need to have a fully mature business model before they become public, and there is not a reason to rush to an IPO. He also noted the more rigors like the endless series of quarterly reports.
Now, he is capitalizing on his advice with the SecondMarket acquisition and Nasdaq’s expanding presence in the secondary private market.
Unicorns like Snapchat made headlines last week when Fidelity, which invested in Snapchat through two different funds, reportedly marked down the value of its stake by 25%. This comes just a month after Fidelity and Blackrock also marked down the value of their stakes in Dropbox.
Should Investors Be Wary of Private Second Markets?
The recent devaluations of these big names highlight the uncertain value of these private companies. Until they can prove themselves in an IPO or other liquidity event, these high valuations are only on paper.
The term “unicorpse” is going to be used with increasing frequency as some of these companies struggle to prove a sustainable business model.
According to the Nasdaq Private Market FAQs, companies must provide a set of information as required by Nasdaq markets. However, they are not held to the same rigorous disclosure as a public company.
Currently, one must have a broker-dealer license to participate in Nasdaq Private Market and clients invested in funds must be accredited investors. But, with talk of making IPOs and private market transactions more accessible, we should be cautious to fall to the same zeal as the venture capitalists. Some of these companies are going to pop faster than the doomed Pets.com.
Average investors need more disclosure from the companies to make a decision before investing in the private market, and that would defeat one of the primary benefits of staying private longer.
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