July 17, 2015 | Blog

Fear the Bubble? Then Embrace Transparency and Liquidity

Silicon valley is abuzz with bubble talk.

It’s the VC conversation starter of choice these days. Frequently, the topic segues into unease about the increasing competition for deals from Valley newcomers. The argument goes that the new investors are inflating a bubble in the venture asset class by bidding up valuations. Often there is nostalgia for the days when investment in the best private growth companies was essentially a private matter involving only a small group of bankers and venture capitalists.

I can say from experience that bubbles are indeed something to fear. They are not just scary for the direct participants, but destructive to the innovation economy generally. As valuations tumble and investors flee to less volatile securities, good companies can’t find capital. Typically, years can pass before a healthy capital market restores itself in the wake of a burst bubble. In the meantime, the primary driver of U.S. economic growth struggles without adequate growth capital.

What I believe often gets missed in these conversations, though, is that greater liquidity and transparency are among the best ways to avoid bubbles.

Liquidity Is The Answer

Consider why venture is so susceptible to bubbles.

Bubbles thrive in illiquid and opaque markets. Venture is an extreme example of both. Private companies do not publicly publish their financial data. Nor do they publish valuations from primary financings or secondary transactions. Secondary selling in these companies is constrained for several reasons, not the least of which is the difficulty just in finding a buyer. When investment can only flow into (not out of) a company and valuation information is infrequently available, it’s easy for investors to “overshoot” intrinsic value.

George Soros once said, “Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.” Combining the natural enthusiasm for the world’s most exciting companies with the lack of transparency and liquidity traditionally associated with this asset class makes it easy for bubble-inflating misconceptions to occur.

Understanding the cause makes it clear that the solution is not to circle the wagons against new sources of capital seeking access to the asset class. I believe the solution is to go the other direction - to increase transparency and liquidity. Doing so won’t eliminate fluctuations in value or turns in the market. However, it should go a long way to replacing the mayhem of bubbles bursting with something more like orderly corrections.

This does not mean private companies should embrace the same degree of liquidity and transparency as public companies. Private companies are now staying private for a reason. They want shareholders that are supportive of the long-term building of value and to ensure that sensitive information is not disclosed to competitors. But these needs can be met while still creating a much more efficient market.

New Era For The Venture Community

It’s also important to recognize that unicorns such as Uber, Flipkart, Airbnb among others, are a new breed within the venture asset class.

Many private companies are going to continue to stay private longer and so more and more of them will likely become much larger than the largest, venture-backed, private companies of a decade ago. This structural shift in the capital market divide between public and private seems irreversible at this point and it’s accelerating.

The number of unicorns, their value, the capital they are raising, the amount of secondary liquidity and the efficiency of the market generally are all plainly increasing at a rapid pace.

Given their size and the number of them (over 100 at last count), unicorns need something far more robust and efficient in the way of capital markets support than what worked in the past. The venture world’s reliance on personal relationships will continue to be central. However, the asset class is now so large and the number of unicorns and the number of primary and secondary share transactions has grown so rapidly that it’s outpaced the ability of Sand Hill Road to organize all of the activity. What is needed is a deeper, more efficient, more liquid capital market.

Democratizing the Venture Asset Class

In my view, the largest part of the innovation economy now lives in the private market.

That’s not to be feared. However, being private need not and should not mean closed, illiquid or opaque. What’s healthiest for the venture asset class and for the overall U.S. economy is for all investors to have access to the potential growth returns to be found in the private market. We need new solutions to efficiently channel capital from a broader spectrum of investors and into the asset.

The venture community should embrace this change and evolve for the good of all of its constituents.

Greg Brogger is Founder and CEO of SharesPost, Inc., the parent of SP Investment Management, investment advisor to the SharesPost 100 Fund, and SharesPost Financial Corporation, member FINRA/SIPC, facilitates access to investments in late-stage, ventured-backed companies.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.

Greg Brogger

Greg Brogger

Greg Brogger is the CEO and Founder of SharesPost, Inc. He founded SharesPost in early 2009 to bring transparency, efficiency and scale to private securities transactions.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own financial advisors before making any investment decisions. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about the subject matter therein, including all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be during their employ directly or indirectly related to their specific views contained in this report.

Analyst compensation is indirectly based upon the growth and success of SharesPost, Inc., including the overall performance of its subsidiaries, the individualized performance of any such analyst, and the development and progression of the overall research effort. SharesPost, Inc. earns revenue from, among other avenues, brokerage sales, and therefore the analyst may indirectly benefit from research reports that have the ultimate effect of increasing trading activity, either through SharesPost Financial Corporation and/or with SharesPost Investment Management, LLC.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, transaction, or security. The opinions expressed in this report reflect the judgment of the analyst at a specific point in time and are subject to change. The information contained in this report has been obtained from sources the analysts consider to be reliable; however, there is no guarantee the any of the information is accurate.

Securities referenced in this report may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.