“I think that at some point in the future there will not be a distinction between a public or a private company,” Barry Silbert told The Observer last Friday. Between how quickly the SecondMarket CEO and founder talks and the slight Georgia accent that softens his vowels, you can almost miss the grandiose nature of some of his pronouncements. “It will be a company that’s traded on the New York Stock Exchange and a company that’s traded on SecondMarket.”
Here, Mr. Silbert straightened in his chair slightly and glanced out the glass partition that forms one of the walls of his office, down a curling hallway that leads to his start-up’s trading floor, the unlikely focus of a great deal of media attention in the past few weeks. As a clearinghouse for securities that can’t be sold on the open market like stock in private technology companies, the company has seen a recent outpouring of news related to its assets, and SecondMarket was also one of the many specialized trading firms that received an inquiry letter from the S.E.C. on the subject of “pre-IPO pooled investment vehicles.”
The trading floor itself is exceedingly quiet, with bustling business-casual workers flitting from one multi-screened computer to another as CNBC plays muted in the background. It’s especially quiet when compared to its apparent competitor, the NSYE, which is located some two blocks away.
Among other illiquid assets like CDOs and mortgage-backed securities, SecondMarket deals in shares of Facebook, LinkedIn, Zynga and Twitter. These companies, and similar ones all enjoy healthy stock business on SecondMarket and its handful of competitors despite the fact that they’re all privately held and not subject to the financial disclosure requirements of a public company.
In 2009, SecondMarket did $100 million in private-company stock transactions, and last year that number rose to $400 million, with half of that attributable to Facebook stock trades.
But if Mr. Silbert is worried about the attention his firm has received over the notion of a “private IPO” for frothy select investors, he doesn’t show it. He smiles frequently and his face is still smooth at 34.
“It’s curious to me that people are somehow equating what’s happening now with what happened in 2000, 2001,” he said, folding his hands. “Because, yes, you have exciting companies whose valuation has gone up significantly in the past few years. But these are real businesses with real revenue and, in some cases, real profits.”
Were this the late ’90s, many of the companies traded on SecondMarket may well have been taken public, but the IPO environment has changed since then. The Sarbanes-Oxley Act has made public accounting much more difficult; self-empowered Internet day traders have cut out brokers who may have been able to hype a stock pre-IPO; and high-frequency trading doesn’t make for long-term investors. When Google went public in 2004, its stock was valued at a conservative $85.
When SecondMarket began as Restricted Stock Partners in 2005, the restricted securities market was estimated to be around $1.2 trillion. The idea for the company came to Mr. Silbert while he was working as an investment banker at Houlihan Lokey, restructuring Worldcom, Enron and other failed companies that, though defunct, had plenty of assets for which there was no proper marketplace. It began as a start-up without any technology, in a space off Union Square that Mr. Silbert describes as half the size of his current personal office, and with a five-person sales team hawking classes of stock in public companies that couldn’t be sold on the public market.
“It was a big deal when someone signed up,” he said of his first clients. He’s particularly excitable when talking about the early days. “We used to have a form you would have to fill out. And when you got it, you’d ring a bell.”
From there Mr. Silbert adapted his platform for other assets, like Lehman Brothers bankruptcy claims and the thornier real estate assets of the last bubble, and developed an online platform for the deals. A former Facebook employee approached the company in late 2008–he’d Googled them–wanting to sell his stock options to a third party, and SecondMarket was happy to put him in touch with their investors. Soon they were doing a healthy business in Facebook stock. They now trade some 40 private companies, most technology-based and all venture-backed.
“It’s very much a caveat emptor situation,” said Lawrence Lenihan, CEO and managing director of FirstMark Capital. After interviewing several businesses that provided similar services, he invested $3.8 million in SecondMarket in 2007 and now serves on the company’s board. “But there’s so much out there about these companies, and people know that.”
And SecondMarket does what it can to protect investors. As if the average $2 million price for assets that sell through the platform wasn’t a high enough barrier for entry, Mr. Silbert only sells to “sophisticated investors,” a nebulous colloquial and legal term that generally refers to financial institutions and high-net-worth individuals.
“We actually do background checks,” Mr. Silbert said. “There are these crazy lists like anti-terror, terrorist-watch lists; we have to make sure that they’re not on that.”
Mr. Silbert says that the next step is to build an environment so that less established companies can also defray costs and pacify investors by putting off their IPOs. “We are helping to create, I think, an entirely new investment class that’s going to help even younger companies access capital,” he said.
Hunch co-founder and angel investor Chris Dixon has a generally positive outlook on SecondMarket, but disagreed with that idea.
“I think a lot of the SecondMarket stuff is driven off employees leaving and wanting to get liquidity,” he said. “If you’re a company like Groupon wanting to raise an additional billion dollars, a lot of which might go toward current operations, it’s probably a lot faster to go to these big funds than it is to go and do a, quote, offering on SecondMarket.”
The news of Facebook’s planned IPO must be bittersweet for Mr. Silbert. He is merely a broker, and if Facebook goes public, he’ll be instantly cut out of a hot-ticket market. When asked how he feels about it, Mr. Silbert remained smiling.
“There will always be another fast-growing, exiting private company that people want to invest in,” he said. “I hope there is, at least. Not for us, but for our country.”