SharesPost To Begin Letting Startups Sell Equity Stakes Directly To Buyers

Secondary markets such as SecondMarket Inc. and SharesPost Inc. revolutionized the trading of private company shares by giving employees, VCs and others a channel to sell the stock they hold.

Now these sites hope to do the same for startups, giving institutional investors the chance to take stakes directly in emerging companies the way venture capitalists do.

SharesPost seems to be in the lead. Chief Executive David Weir told me he plans to permit startups to sell shares directly to institutional investors starting next year. “There is a lot of interest” from startups, he says.

Expansion and later stage stakes are the initial target, Weir says, and SharesPost will facilitate the necessary due diligence that goes along with evaluating private company business opportunities.

Jeff Thomas, vice president of SecondMarket, says his company is looking at the opportunity as well.

Both set up shop in 2009 when a slow IPO market limited liquidity options for startup employees, angels and venture investors. Growth appears to continue. SharesPost now has 37,000 individuals and institutions registered on its site, up sharply from earlier this year.

The markets also appear to have attracted increasing institutional interest. Weir says transactions involving institutions — mutual funds, hedge funds and the like — now make up about 40% of the site’s dollar volume and the percentage should continue to grow.

“We’re seeing an increasing amount of demand from institutional investors,” he says. “They are looking for high growth opportunities.”

Because of this interest, institutions are dedicating more resources to researching and understanding private company investment opportunities. The efforts have accelerated over the past six months.

Yet, the buying remains concentrated in a small number of names. On SharesPost, 80% of the transactions, as measured by dollar volume, continue to be in about a half a dozen companies, including Facebook, Twitter and Groupon.

The interesting test of the new plan to let startups sell equity stakes directly will be to see whether it broadens deal making and opens venture more readily to outsiders.

“At some point, you will see professional money managers raising capital to invest in private companies,” predicts Weir.