Secondaries Make Sense –

I expect most venture capitalists will have mixed feelings about the topic of this month’s cover story: the growing secondary market for investments in portfolio companies.

It’s understandable that a limited partner-whose sole purpose is to make money for its investors, like pensioners-may need to sell its stake in one or more venture funds for strategic reasons. But it seems a little strange to hear about a venture firm selling its equity stakes in portfolio companies. It appears to run counter to venture capitalists’ raison d’etre: helping entrepreneurs build successful companies.

But I can think of some perfectly good reasons why this emerging market is needed, not the least of which is the inability of some dot-com firms to raise follow-on funds. If you’re an entrepreneur who’s been backed by one of those funds, what do you do when your lead investor has run out of money and doesn’t have time for you because he’s moved on to a new firm and new investments? Wouldn’t you be happy knowing that your VC’s equity stake has been sold to an investor who will actively work with you to help you succeed (because that’s the only way he’ll make money) and that the investor has fresh capital for later rounds?

Similarly, what about those equity stakes in portfolio companies that are languishing in old venture funds that have stopped investing? Isn’t it better to sell those so-called “tail ends” if you’re not going to give them the time and energy they require? You get some of your investment dollars back and the secondary buyer gets the opportunity to turn that old “asset” into something more valuable than what he paid for it. Of course, if the company goes on to fame and fortune, you’ll feel plenty silly for selling your stake. But at least you’ll know that you helped contribute to that company’s success by matching it with a buyer. And helping companies is what VC is all about, right?

Read Senior Editor Matthew Sheahan’s excellent piece (starting on page 26) and let me know where you stand on this issue.

-Lawrence Aragon