Public Markets Cooling, Hot Private Markets

Nasdaq (NDAQ) announced that it would acquire private transaction platform,SecondMarket. Founded in 2004, SecondMarket was the 2nd most active private tender market in the US. The company’s primary business is providing liquidity for employees in private companies to conduct private tenders to sell their shares, while providing their employers control over the frequency of the process and who gets to buy/sell shares.This acquisition comes amid a tepid market for tech IPOs. Public tech listings have fallen this year to the lowest point they’ve been in 6 years. Indeed, private companies are raising massive amounts of capital from private sources. Tomasz Tunguz, a venture capitalist, did the math on public/private markets disparity and it’s staggering.

In 2014, there were 211 $40M+ growth rounds – just about one per day. In contrast, there were 15 US IT venture-backed IPOs with offerings greater than $40M last year, slightly more one IPO per month in 2014.

There are a variety of factors behind the drop in successful tech companies deciding to publicly float their shares. Jeremy Kopelman of First Round Capital calls this the “private IPO phenomenon“.

According to the venture capitalist:

In my opinion, there isn’t nearly enough focus on “low frequency trading.” Public companies reprice daily. Private companies don’t have to reprice for years on end.

One key benefit of low-frequency trading in private companies is a long-term focus. It removes arbitrary time constraints on growth and profits. By relying on private financing events as “comps,” we risk pricing new financings (and creating new unicorns) based on stale valuations.

With public transactions cooling, Nasdaq has made it clear the exchange is looking for more ‘growth-y’markets. Nasdaq established a partnership with SecondMarket’s larger competitor, SharesPost, in 2013. The partnership, called Nasdaq Private Market, never really found a lot of traction and Nasdaq reported it would be buying out SharesPost’s stake in the venture.