UPDATED 13:38 EDT / APRIL 23 2009

Entrepreneurship Liquidity Market – The Private Privates – We need Liquidity But First Standardization

image I love market forces. The NY Times has a great story about an emerging trend – a private liquidity market – a private Private market. I wrote about this trend last year in August 2008 when it was apparent that Silicon Valley was already doing it (well almost).

In August I wrote:

What we have here folks is a mini or private Silicon Valley quasi-IPO market. In the absence of any liquidity option the Silicon Valley VCs and private capital markets need an outlet. This is self preservation of the Silicon Valley way.

I wonder what the implications are on a sort of mini-liquidity market? Personally I think this is a good thing to fuel some innovation and reward.

All this is a pre-text to the posturing that Facebook will stay private and not be sold. One poison pill to take is keeping early employees happy and rich.

Lets hope that Facebook doesn’t cause the wealth problem being experienced at Google – the haves and have nots. As Google approachs thousands of employees who are underwater in stock verses the handful who have FU money. Facebook better be careful to make sure that new employees don’t feel alienated by the early guys getting rich in a private quasi-IPO.

Overall I’m a fan of liquidity.

image Additionally, the private market is backed up on the VC front- I posted another story on that in July 2008 – "Problem with VCs – Their Back Teeth are Floating – Portfolio Backlog and Gridlock – An Opportunity for VCs.

Here is what was said back in July 2008

The big problem is lack of liquidity. My last company was venture backed in Silicon Valley. When there is no capital markets both on the public and M&A side I can tell you that things get crazy.

Most VCs don’t know what to do with portfolio companies after 3 years (even when they are performing ok) Their model is 3-5 year horizon. I would argue with the new environment that their investment time horizon is now limited to 3 years. If there is no exit after 3 years the number of investments a partner makes starts to backup – what I call “portfolio gridlock’. This means that they get “deal backlog’.

A venture partner is like a sales rep – they need new deals in their pipeline and to get the old ones out. No human can be on 9+ boards and be effective. So VC need to get rid of their old companies and make way for the new. It’s a problem screaming for a solution.

Here’s the problem in today’s market when there is no exit model. Most VC partners in Silicon Valley are so backed up their ‘back teeth are floating’. The other problem is that the VC model is all about building up more equity in the later years (control equity to prepare for the exit). So you have a venture capital firms with majority control and no time and energy to assist the companies. And now there is no exit.

I think that this is new ground for VCs and certainly challenging. However it’s an opportunity. There are some great companies out there who are building businesses. Problem is the VC are in control of most of them in a dead market for exits. The need of the VC is to unload these companies. In the current market just shutting them down or quietly selling them kills the entrepreneurial edge and jobs – a blow to the entrepreneurial system. It’s an opportunity for new kind of investment firm one that services this macro trend.


More posts following that on what I am seeing as a new venture capital market. We need a new approach. Liquidity is key. Stagnant entrepreneurship will dry up any innovation. We need leadership here fast. The early stage guys get this like Fred Wilson at Union Square and Jon Callaghan at True Ventures.

More from my opinion on the new generation of investors and entrepreneurs:

In this next evolution of the global Internet there is an explosion of large-scale new market trends and opportunities. These opportunities will be powered by a new generation of entrepreneurs ready and available to create ideas, companies, products, jobs, and wealth. Even with the looming financial crisis and outdated venture capital models, there has never been a better time to start a company.

Today, we are seeing that large companies are reducing their workforce releasing thousands of available talent and expertise. The workforce structure is now global with collaboration capabilities spread across geographic boundaries. The simultaneous decline of organized core and applied research and restrictive H1b Visa limits create different paradigms of how to identify, filter, and organize companies of the future. This emerging paradigm changes the research and development process. Large companies no longer have the ability to innovate in-house due to cost and expense constraints, so they will increasingly turn to startups to fill product gaps and provide for product line expansion.

With costs to start a company decreasing there are new business and revenue models emerging and solidifying, and a whole new generation of digital technology of tools and platforms omnipresent: Facebook, Google’s Open Social, iPhone, Gphone, Broadband Technologies, and even digital set top boxes. New entrepreneurs, however, face lots of obstacles in making their vision a reality, and many great ideas and great talent never get out of the starting gate.

Interesting conversation going on at my FriendFeed page here – comment below or on FriendFeed

We need solutions. I’ve been seeing tons of zero and early stage activity and their needs to be an outlet. Right now the lack of liquidity is like "a big rock blocking the river" and soon the "river" will flow around and ultimately the energy of startups will push the "rock" out of the way.

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