SecondMarket: invest in a startup that's not even public!

Hey, everybody on Hollywood. From CNET.com here at South by Southwest 2012. We are at the SecondMarket Recovery House which is actually the brainchild of this man right here. Yeah. We're joined here today with Barry Silbert who is the founder and CEO of SecondMarket. Now, when we first heard of SecondMarket, the company, we know that it's kinda is the company where people would let's say private shares in Facebook are exchanging them. So can you kind of explain how... That's it. That's all we know. Yeah. Honestly, that's what you guys are you know kind of recognized by with the forefront with but can you kind of explain all of that and other things that SecondMarket does. Yeah. Of course. So we are creating the next growth market, the next Nasdaq. We're creating a market place where all the fast-growing start-ups spends some time, a number of years before they ultimately go public or as alternative to go public. Going public nowadays is really tough. You gotta be a billion dollar company. I gotta tell you, it's hard to build a billion dollar company so we're creating that spring training, that bridge to get companies to that stage where they can allow the employees to sell some stock at the right time. They can maybe raise some money and there's a real need for this and so we've had over a billion dollars in transactions across of that 50 companies so far. That's interesting. I like what you said or are interested in what you said about companies are not gonna go public. So you can actually allow a private company to have stock options that are worth something to embrace through private investors? Right. I mean imagine that. Imagine these options that we get. Instead of having a lottery ticket, actually having some real values. Now, it takes like 10 years to go public. Think about that 10 years to go public, knowing or planning to stay on a company for 10 years. Bad for Angel investors, bad for venture capitalist and so we're creating this inner step to give companies at least the ability to get to be able to go public or maybe as an alternative. So one of the things that we think about when we hear that also though is that does this more benefit I guess the employees and people that have the money to invest on these shares 'cause at the moment, this is not something I think someone like myself could jump in and say I'd like to buy some shares of like someone from a start-up company right now, right? Yup. So we're regulated. So we have to comply with the SCC rules. Since the SSC rules say to be able to buy the stock, you have to be like a high-net worth investor. I would love to see that change and I wanna make that change hopefully in the next few years but for now it is limited to a number of investors but need to break or sell. Whether you are a rich person or just out of school, if you have this private stock, you can sell through us. Right. So it's not for us. Wrong. Right now this will be a public thing which is not the purpose that you are trying to go by. Yeah. You know the SSC wants to protect kind of the unsophisticated investor. Now, why they tie that worth of sophistication, I don't know but that's the SSC right now. Really smart. I'm just kind of broke right now. So but really, it sounds like in some ways at least for those companies that are gonna stay private, it's just a way for them to do more, better maybe better venture capital raising in a way that it can also benefit employees. It's great for employees because it means that you could actually get some value. It's really good for the companies from a raising money perspective because being able to tell potential investors, hey. You don't have to wait 5, 7, 10 years to get out. You maybe have to wait 1 year or 2 years. That helps companies raise money more efficiently and definitely in a better evaluation. But what does it do in terms of taking stock off the market for a company that is gonna go public? Like does somebody already know how to get Facebook stock in all the good prices? I mean, okay. I'm not gonna be naive. I know that's already true but do you make it worst? Well, think of it this way. Actually, I think we make a better because what happens over the growth of a company is you have some early investors that wanna get out who would sell at the IPO where the sooner off the company could probably go public but the way we're doing these, we're helping companies transition those early-stage guys off the cap table and bring in new longer term investors who will not just hold in the IPO but buy after the company goes public. So after taking a lot of kind of the supply off the market and bringing in value at investors. It sounds like that because Facebook is the extreme case. You are really trying to serve more of the start-up community but because Facebook is just the reason, like you know, that's the name that's associated with SecondMarket, right? Right. I know it's like with the catalyst. That kind of creating a lot of buzz but we have 20,000 companies profiled on SecondMarket right now and the thing that we're actually announcing today or early out today is we're allowing all those companies to claim the prices on SecondMarket, get themselves noticed in the investment community. So whether they wanna raise money or do some type of secondary equity, they can now have a showing to the investor in public. So you have already created these profiles of companies. How do you create the profiles of companies you think are promising? Yeah. Some companies request it. So it's really easy to go on there. It's free. You say hey, create a profile for me or if they've done a round of financing, whether it's Angel or Series A, we've probably created a profile for them already. Okay and then they can go in and say hey, that's me. That's me and then what's really cool about it is it's a way for you to basically attract and track investor interest so even if you are not raising money, it's kind of like your profile to investment community 'cause we have a 100,000 investors on the system that want to invest in just these types of companies. So you are like half LinkedIn, half Nasdaq. Yeah. Absolutely. Absolutely. Okay. I got it. I finally got it. That means you see a future with a lot of start-ups 'cause it used to be at least, you know, in the boom that going public is the holy grail for start-up and do you see a future when a majority of start-ups don't try to do that? I think at some point in the future, there's not gonna be a difference between public and private and there really shouldn't be. What is gonna be is there's gonna be different market places where SecondMarket... we're all about being company-friendly. We're all about giving companies complete control over how their stock trades. So on SecondMarket, you decide when your market is open. It might be once a year. You get to decide who is allowed to buy and you disclose information but it's only to people you approve. So you are not like having to file all of your secrets into the public. So now there is a checking balance built-in in filing your secrets to the public, right? So that shareholder relationship creates a produced share of responsibility, creates trends of frenzy. Is there any downside in companies being able to keep all the secrets out? Well, we're all about trust and transparency and so we require information we disclose but just because we're not disclosing it to the whole world doesn't mean that it's not all the material information. I mean companies have to file these long 10Ks, 10Qs, all these filings that no one actually even really reads and we are trying protect the unsophisticated investor... The journalist and investors and regulators read that information. Like you said, you are regulated by the SCC, right. So the SCC still has access to all of these information? Absolutely. Absolutely, yeah. Okay. And then if I did like a freedom of information after request I would still be able to get this information on a company? Give a shot. I don't know. I will. I mean we're for as much transparency as possible. So it's kind of interesting... one of the exciting things about Facebook or in public for a lot of users was okay. Now, we get to look behind the curtain. Well, I think you know the problem is companies should not public until they mature, until the business model is mature and when you see these companies used to be able to go public when they were much younger. The public market liked those types of companies but today, when you look at some of the companies that had gone public, they've been destroyed in the public market. It's very much a casino now. It's high-frequency trading. It's people short-selling. It's something that I don't want to be part of as a CEO so I wanna keep my company private and those are as far as I knew do as well. Yeah. That seems very reasonable. Now, I know you guys kind of go beyond this. You have some other projects like investing in local banks and helping them out as well, right? Yeah. So what we've done is we've created this as I mentioned before this very large network of investors. It's a 100,000 investors that want to invest in unique investments. So what you're gonna start seeing from SecondMarket actually very, very soon is we're gonna start to making available to all these investors unique investment opportunities. Things raging from special fund vehicles that allow you to invest in certain types of other companies, to real estates, to fixed-income investments. Stuff that you just can't find elsewhere, we're gonna deliver to you right into your inbox. Okay. So then are you gonna lobby the SCC for jumping up to smaller investors? Expand those rules in definition. I know. Like some rich people are getting richer and I'm getting mad. Well, so my idea is I think there should be a test. So you can either have a lot of money or you can basically take a financial literacy test and I have offered that to the SCC. In fact we've offered to create it and I think that will happen but it's not gonna be this year. It will be about before the time... the 6th or the 10th or about... Yeah. Exactly. Okay. Now, before we let you go the other great service that you do to the people here in Austin at South by Southwest is this Recovery House that we're in right now. How long have you been doing this? So I'm actually a newbie to Southwest. This is my first year and so... Yes. I'm having a blast already and so you know, it's really kind of all about bringing together lots of great people. We gave some really cool parties over the next couple of nights and we've got free coffee and free drinks. So what else do you need? Yeah and I gotta say, Austin, wonderful town. Not good coffees. Not good. There's like little cup of coffee here is staying right there. It's also all about this is your first South by Southwest. You are still cheery and chippy right now but I think give it a couple more days, the bad vibes are gonna develop. You are gonna start moping in like another interview. So got you a good time. We did. All right. Thanks a lot for your time there, Barry. Thank you, Barry. You can find all of the interviews that we need here at South by Southwest at CNET TV.com. There's a lot more good stuff. So check it out.