We Need A New Path To Liquidity

Watching all these machinations between Microsoft, Yahoo!, Google, AOL, News Corp/MySpace, and their ilk makes me sick. They are playing around with Internet assets like they are toys. And meanwhile the services we have come to rely on like Flickr, AIM, Delicious, Yahoo Groups, FeedBurner, etc are an afterthought.

The Internet is decomposing into a vast array of micro-services that we, the end user, stitch together to make our own unique web experience. It is the de-portalization of the Internet and it is very real. And yet, these large behemoths are trying to do their normal consolidation play on the Internet. First of all, it's not going to work. They are destroying value with all of their M&A efforts and the bigger they get, the more value they will destroy, for them and their shareholders.

But honestly I could care less about them. The only company on the list at the top of this post that I am a shareholder of is Google and I don't see them bidding for assets, just sitting on the sideline trying to figure out how to extract some value out of this game of musical chairs that their competitors are playing. But even Google is not without fault. It has bought a number of assets over the years and several of them have languished. I see them making some decisions about how to consolidate these web services inside of Google and I scratch my head. And that's Google, the best Internet company in the world.

Here's the problem. The company/web service creation process needs some kind of end game. The entrepreneurs who spend years and risking a ton need a way to get paid for that effort. And those of us who finance their efforts need to get some return on our investment. We can argue about the magnitude of the return we need and a host of other things, but the fact remains that without a path to liquidity, all the innovation that is being created by the entrepreneur/VC equation will stop happening.

The IPO market is closed and frankly hasn't really been that robust (at least for technology/web offerings) since the crash in 2000. And even when it's open, it's nuts to take any company public that cannot deliver consistent and predictable growth and earnings quarter over quarter for years. That's what the public market investors demand and they should demand that as they have no control over the companies they invest in. The public markets should be for the best companies. Apple, Google, Amazon, eBay - those are good public companies. Skype, YouTube, and the current Facebook are not.

So if you can't take a company public, how do you get out? M&A has been the primary answer in the web/tech sector for the past eight years. And it's been a great period to sell companies. We've sold three in the past couple years out of our Union Square Ventures portfolio, delicious, FeedBurner, and TACODA, to Yahoo!, Google, and AOL, respectively. Were we happy to take their money? Yes. Were we happy with the outcome? Yes. Were they good buys for their new owners? On the face of it, yes.

But if you look deeper, I wonder. Delicious grew nicely for a while under Yahoo!'s ownership but recently the user base has fallen off pretty dramatically. I double checked this chart in compete and alexa and they all show the dropoff.



Well, what about FeedBurner? Clearly Google has done a good job with that acquisition. Well I am not sure. I don't see any integration between Adwords and FeedBurner yet. I can't buy FeedBurner inventory through Google's text ad interface. I honestly don't see any additional money flowing to me, the publisher of the feed, since the Google acquisition. There's no way to know what the rate of signup by publishers has been since the acquisition, but I wonder if it's increased much.

And TACODA? I know that TACODA had an incredible fourth quarter post the acquisition by AOL, blowing way past the numbers we were projecting in our annual budget. But in the first quarter, AOL fired Curt Viebranz, TACODA's CEO, and many of the top members of the TACODA team are now gone from AOL. Another acquisition messed up.

But who am I to complain? We got paid right? So sit down and shut up.

Except I am also a user of these services. I see what happens when a company gets purchased. The service languishes. The team leaves. It stops getting better. And often gets worse. And so even though I am happy to take the money, I am left wondering, frankly wishing, if there is a better way.

This topic came up in the comments to my Decline of the Firm post and one thing that was mentioned is Goldman Sachs's GS True market. As my friend Roger Ehrenberg (author of the awesome Information Arbitrage blog) explains on Seeking Alpha:

But now there is a new game in town, and it relates to IPOs: Goldman Sachs' (GS) GSTrUE ("GS Tradable Unregistered Equity OTC Market") program.

It turns out that there is another private liquidity market under development called Opus-5.

The idea behind both of these new emerging (and currently illiquid) markets is to provide a place for private equity investors to trade securities with each other. The companies remain private, do not have to file with the SEC, and do not trade daily like public stocks do. When an entrepreneur or investor wants liquidity on a position they own, they come to these private markets, offer their position or part of their position for sale, and a trade is made.

We don't even need liquid markets to develop to allow this to happen. We already have entrepreneurs selling pieces of their ownership in the later private rounds to VCs. And when we we decided to sell the Flatiron portfolio company Bigfoot Interactive three or four years ago, three of the top five bidders were private equity firms who wanted to buy out the VCs. We could have easily gotten as good of a return on our investment in that company by selling it to a new set of financial owners instead of a strategic buyer.

SAI contributor Fred Wilson is a partner at Union Square Ventures. He writes the influential A VC. Please comment below or on the original post.