Venture capital's demise at the virtual hands of the private markets has been vastly exaggerated, industry insiders say.
Word that Securities and Exchange Commission officials might expand trading of private shares to include companies with more than 499 shareholders sparked discussions on whether the expanded private markets would make venture capital obsolete.
Venture capital executives say they shouldn't be counted out quite yet. Money is not the only thing they provide for young companies in which they invest, round after round. Venture capital also provides contacts, expertise and guidance. What's more, private shares are viable only for a small slice of later-stage companies, venture capital firm executives say.
Even if the SEC doesn't expand the private market, activity on the so-called secondary market has been on the rise, in part, due to the development of secondary trading platforms, according to Mark G. Heesen, president of the National Venture Capital Association, a Washington-based trade association.
One of those platforms, New York-based SecondMarket Inc., more than doubled its private trades in the fourth quarter of 2010 to $157.8 million. SecondMarket facilitated $500 million in private-company transactions between its launch in April 2009 and the end of 2010, according to its fourth-quarter report, the most recent available.
“We don't think it will replace venture capital,” Mr. Heesen said. “The secondary market is a financing transaction.”
The poor IPO market over the past few years led venture capital firms to use private markets as a way to provide liquidity to their portfolio companies, Mr. Heesen said.
Venture capital executives found they were holding companies for a decade compared with the five to seven years they had planned, he explained.
“At that time, venture capitalists thought the private markets were helpful,” Mr. Heesen said. “You want to keep entrepreneurs hungry, but you don't want to starve them.”