Six Quick Questions: Sam Schwerin

Startup employees and seed investors used to assume they’d have to wait for an acquisition or IPO to get any cash for their company shares.

No more. With the growth of direct secondary investors such as Millennium Technology Ventures and Digital Sky Technologies, hot private companies are finding eager buyers for their shares. Since last year, venture-backed companies from Facebook to Yelp to Zynga have tapped such funds to provide partial liquidity to shareholders.

Forecasts call for more to come. One indicator: New York-based Millennium, which focuses on purchasing stakes in category leaders in the Internet and technology sectors, closed a $280 million oversubscribed Fund II in late April. The 11-year-old firm, which has about $600 million under management, had originally sought $200 million for the new fund.

Managing Partner Sam Schwerin won’t say how much Millennium made when paid $940 million for portfolio company, or how it did on the sale of portfolio company Tellme Networks to Microsoft for a reported $800 million.

But Schwerin did talk with VCJ Senior Editor Joanna Glasner about Millennium’s new fund, his outlook for the secondary direct market and where the firm plans to make its mark.

Q: What kind of deals do you do?


It’s 100% secondaries. To date, we have done about 300 secondary direct investments. Over 40% of deals are buying stakes from institutions [such as strategic backers and investment firms] and the rest is from individuals, typically founders and senior employees.

Q: How has the economic climate affected the deal pipeline?

A: We’re seeing fewer institutions trying to sell portfolios. In 2008 and 2009, we saw institutions trying to gain wholesale liquidity, either through the sale of a whole portfolio or a strip. Today it’s completely different. I’m not seeing wholesale interest in liquidity. What I’m finding is angels and earlier stage investors are now interested in taking some of the chips off the table on their winners.

Q: How do you typically structure a deal?


In a company like Zappos or eHarmony, we tend to do several positions per company, with the total investment tending to range from $5 million to $20 million, generally deployed over a year or two.

Q: What size stake do you normally take?


We typically have 7% to 12%, excluding some anomalies, like Facebook, where it’s smaller. Overall, it averages around 10 percent.

Q: Is this shaping up as a busy year?


We’re highly confident we’ll deploy more capital. Over the next market cycle, we think the secondary direct market will grow to be about equal to the secondary LP market.

Q: What do you do when you’re not working on investments?

A: I’m a pilot, so I tend to fly a lot. I have a small plane called a Lancair.