VC-backed companies explore alternative liquidity paths

The traditional route for liquidity in the venture world is the IPO, but the past two years have seen the emergence of the venture secondary market, write Sam Schwerin and Dan Burstein (pictured).

Consider these indicators of accelerating growth in the secondary market for venture capital assets:

• In the first month of 2011 alone, the dollar volume of secondary share transactions for private technology companies (such as Facebook, Groupon, Twitter, and Zynga) topped the total dollar volume for all of 2010, which itself was a record.

• The frenzy of early 2011 activity has brought huge new players into the secondary market for private venture assets, including behemoth investment banks and funds such as Goldman Sachs and JP Morgan.

• Even as we witness a new period of extraordinary growth and value creation by leading technology companies, many of the most promising among them are electing to remain private longer, not because the IPO window is closed, but because they can tap alternate sources of liquidity to accomplish their goals. By staying private longer–while benefitting from alternative liquidity–companies can finish the business model honing and strategic objectives that will make them bigger, stronger public companies eventually.

Reflecting on the explosion of the dollar volume as well as the newsworthiness of secondary transactions, 2011 is off to a running start as the “Year of Alternative Liquidity”. We expect that just about every major private technology company is going to explore the secondary market this year, if they have not done so already.

Here are five forecasts relative to the expansion and growth of this market:

Forecast No. 1: A trillion dollars of new public market capitalisation will be created over the next five years by today’s top 500 private technology companies. But many of the high-growth companies at the forefront of current technology trends will not focus exclusively on the holy grail of the IPO, as used to be the case. Many of the best companies will consider alternative liquidity solutions along the way.

Forecast No. 2:  2011 will be a record-breaking year for secondary venture capital investments.

Forecast No. 3: Secondary investing in private technology companies will become a $10 billion annual market sometime over the next three years. The size of this market will further cement the place of secondary liquidity as a fundamental, valuable, and newly permanent part of the venture capital ecosystem.

Forecast No. 4: Company executives, boards, and investors will take more control of the alternative liquidity process and seek out high-quality institutional partners for their alternative liquidity needs. What were once small third-party transactions will become comprehensive solutions aimed at employee motivation, capital structure alignment of interests, and programmatic liquidity throughout the private phase of the lives of successful, high-growth companies.

Forecast No. 5: The IPO market will have a strong year in 2011, simultaneous with the growth in secondary market activity. Venture-backed technology IPOs will surpass the recent record year (2007) in dollar volume of new public offerings.

Traditional IPO success and pre-IPO secondary liquidity were once thought of as opposing trends. Today, however, they actually work together as different facets of the same set of market conditions. 2011 will be a record-breaking year for the dollar volume of secondary transactions, as well as a strong year for the dollar volume of venture-backed IPOs.

Sam Schwerin and Dan Burstein are managing partners at Millennium Technology Value Partners.