Secondaries Are Back

raining_moneyIn recent years, the secondary market has gone from hot to not and back again. And it looks poised to pick up steam going forward, as an unsteady public market forces more startups to push out their IPOs.

In the last two weeks alone, two investment firms that help cash out inside shares of privately held companies have closed new funds. The first, Founders Circle Capital, raised $195 million across two funds, beating its $125 million target. Another, Akkadian Ventures, just today closed on a $75 million fund; it was targeting $50 million.

A third firm, the new brokerage Battery East, officially swung open its doors last month with the aim of getting employees shares into the hands of growth-hungry institutional investors.

The outfits – all in San Francisco — each face the same challenge: Getting on the good side of startup CFOs, who typically have strict rules that limit share sales by employees. Toward that end, they’re actively working to differentiate themselves.

Battery East, for example, boasts of its connections to both Wall Street and Silicon Valley. The firm was founded by Barrett Cohn, a former adviser at Maveron, and Michael Sobel, a former BlackRock executive. And they recently hired Howard Caro, the former general counsel of Founders Fund, and Duncan Niederauer, who recently retired as head of the NYSE.

“We’re in close dialogue with large mutual funds, who [will] tell us there are three or four companies they have their eye on,” says Cohn. Battery East’s network also includes “folks who are looking for help, like the CFO who wants to run a tender offer, or the C-suite person who is moving on and needs help, or venture firms that are doing portfolio restructuring – especially guys who have companies that are way up and to the right.”

Battery East is “definitely seeing an uptick in demand and we think it will grow as the market does what it’s been doing of late, combined with blue chips that aren’t blue chips anymore,” says Cohn. “I don’t have a number to put on [that increased demand], but in just the next six months, more than a billion dollars of institutional buy-side demand is coming online from mutual funds, hedge funds” and others.

One major prong of Battery East’s strategy involves running auctions that “help companies advocate for employees better by running a real process around [the sale of their shares].”

Two-year-old Founders Circle Capital, meanwhile, doesn’t involve third parties at all, instead buying the shares directly based on their 409A valuations from startups’ management teams. (So far, the firm has assembled stakes in Ebates, Dollar Shave Club, Good Technology, Kabam, Lumos Labs, and Ticketfly, among others.)

“You’ve got great companies that are growing quickly and making the strategic decision to stay private longer,” says cofounder Chris Albinson, who previously co-founded Panorama Capital and was a general partner at JP Morgan Partners. Yet “they’re also dealing with this pressure valve of 400 employees working hard for a long period.”

Albinson compares building a “world-class company” to a marathon, saying that Founders Circle is “like the water station at mile 21, giving people what they need for that final push.”

Three-year-old Akkadian Ventures sees itself much the same way, says its founder Ben Black, who similarly touts Akkadian’s ability to buy directly from a startup, which helps ensure that the startup knows and trusts everyone on its cap table, even after its shares have traded hands.

There are differences, however. Unlike Founders Circle, for example, Akkadian also offers “option exercise loans.” (Black describes these as fairly modest in size.) Akkadian also facilitates co-investments in some cases when its LPs want access to more of a particular portfolio company. One arrangement included a co-investment in the ad tech company Rocket Fuel, which enjoyed a highly successful IPO in 2013, though its shares are trading down dramatically today.

“We’re not trying to time the market,” says Black. But he adds that in the last six months, Akkadian is seeing more companies that might have forbade insider sales beginning to rethink some of those rules.

“Companies see that liquidity can be a powerful tool in the war for talent,” says Black. “You can’t [compete] when companies are providing secondary liquidity to their employees and your company is not.”

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