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richard rosenblatt

I had a conversation with Scott Rafer on Skype Sunday night, where I requested a video interview of him on SecondShares so he could express his views on the secondary sale of private company stock in companies like Facebook, Twitter and Zynga, as well as the recent angel investment “bubble”. Scott declined to be interviewed by SecondShares, expressing his concern that we are “legitimizing” the private secondary shares market, which he feels strongly against.

Apparently there appears to be a growing sentiment among a select few within the startup community that the secondary markets should be avoided like the plague.  This post is in response to a post written by Scott attacking us (but not naming us) and the secondary market for private company stocks, and is intended to clarify our mission and the value of the secondary market for private company stock, since its apparently not yet clear to some rather influential and smart individuals within the startup community like Scott.

Interestingly, after our ten minute conversation on Skype, Scott responded by writing a blog post that started with “There’s No Insult Intended…”, yet in his blog post he said:

“…as is clear, Google is forever. I’m not going to voluntarily have my name indexed alongside his domain.”

SecondShares hopes to provide a platform for all parties to articulate their views on the secondary market for private company stock, and we had hoped Scott would accept our invitation to participate and provide his views.

In Scott’s post he incorrectly described SecondShares as:

“His blog covers solely the market for private stock sales. He only succeeds if it becomes a legitimate market. I am very concerned that we’re just seeing the start of a giant wave of these crappy deals and that they will total many billions of dollars in the coming years. His domain, his logo, and 90% of the articles on the site are legitimizers of this poorly considered macro reaction to the over-regulated mess we call the IPO process.”

Scott is either misinformed or unaware, but to clarify, SecondShares provides news, commentary, and Wall Street style analysis on private internet companies.  We do not solely exist to report on private stock sales of internet companies.  In fact, we don’t even know when the second market transactions occur.

Scott states that his concern is to not “legitimize” the secondary market, however, he addresses it on his blog. The reality of this emerging market is that Scott and many others ought to act to legitimize this market whether it be on our SecondShares site or not.

The public market’s decade long bear market burn of value in the US public equity market needs a new way to channel value creation because a chart of the S&P over the last decade demonstrates that the US public equity market is broken!

History has demonstrated that the birth of many markets has been marked by a chorus of discrediting and undermining commentary by many including the entrenched players at risk.  The case in point today is the secondary sale of private company stock, also known as the second market.  Some, like Scott, within the startup community are articulating their concerns.

“I’m concerned about the inevitable ripoff artists who will start shell companies solely to sell their shares on SecondMarket (or wherever). They’ll have documented some silly plan about rolling up small social game publishers, Groupon clones, or whatnot.”

Before one casts further dispersions on other legitimate business approaches and strategies such as rollups of synergistic businesses one ought to consult with one of the many wildly successful business managers greats such as Jack Welch formerly of General Electric that was noted for building one of the greatest companies in the world with such a roll up strategy, or the highly successful internet entrepreneur Richard Rosenblatt of Demand Media or even Mark Pincus of Zynga (which has rolled up quite a few application companies.) The list goes on and on.

Given the precarious state of the world’s public equity markets it is quite concerning to us that so many within the startup community are seeking to cast dispersion on a market that is so strategically critical in today’s financial environment and possibly for many years to come.

Though Scott’s contrary logic still evades us, we are the preeminent blog for thoughtful commentary and analysis surrounding private internet companies by acknowledged, seasoned and successful Wall Street professionals.

More ironic is the idea that Scott apparently believes that there can be any legitimate market that can steadfastly avoid the “crappy deals” and “inevitable ripoff artists” that he speaks of in such a way as to believe that they only exist in the realm of a market like the secondary market.

One might consider recent events such as Bernie Madoff’s escapades, pink sheet shell company scams as well as countless public stock manipulations before relegating such activities to the realm of a new market such as the one SecondShares expounds upon. Importantly, it is worthy to note that insult is added to injury in that the public market’s crimes count as its victims those that are not accredited investors, while the inevitable incidents that may occur in the secondary sale of private company stocks do not! Scott’s concerns would be much better placed on a public market of tens of trillions of dollars, rather than the emerging legitimate and the strategically critical secondary market.

While Scott may scoff at the notion of this market being a strategically critical market, the ultimate irony is that the private market that Scott fears to “legitimize” has been his personal choice of venue establishing the value of his companies!  While Scott may say he raised capital and sold equity to “professional investors” (angel investors and venture capitalists) the fact of the matter is that markets have a history of broadening out and the accredited investor qualification of the secondary sale of private equity offers a protection that the public equity markets do not offer. In the end, as we all know, the world is getting flatter and to pretend there isn’t more business intelligence more firmly planted more broadly than it ever was before is to believe the realities of why the second market has the credibility and traction that it does. This is why SecondShares was established to create a reasoned voice of commentary and analysis in a market that is destined to grow in its importance and consequence. Again, we would say that Scott’s concerns would be better placed on a much larger market with less protections around the unsophisticated investors involved in investing in the US public equity markets.

To keep things very simple, in a bear market the gravitational pull of the market is such that it is directed at pulling down the value of publicly traded stocks. Importantly, we believe there is a growing trend to consider that the use of stock to attract and retain key employees as well as the use of a stock based currency to acquire strategically critical assets is mission critical and best not left to chance valuation in a bear market.

The only irony greater than where Scott chooses to blog his views on the secondary market is that he would suggest to others that they leave the critical strategic imperative of how a stock gets valued to be relegated to the whim of a public bear market rather than to an orderly, governmentally blessed and legitimate second market. It’s not likely an accident that there is more value today than ever before being captured in the companies that make up the secondary market.

Perhaps it’s not a mere oversight on the part of all these non-public companies with values in aggregate well north of one hundred billion dollars. We just doubt that that they simply forget how to file an S-4 with the SEC to go public. Ask any of the countless investment bankers chasing Facebook and the many other companies that would be gladly be shown the rubber chicken laced road shows required to go public. They are clearly choosing not to go public. There is a lesson in this for many that think that the road of running a successful company must go through the IPO door.

The strategic imperative of thoughtfully considering how a Board and a management team chooses to have their company valued may in fact best be left to a market that they can believe in; rather than a public equity market noted of late by the SEC for the largest insider trading scandal ever in history and is looking more and more like Japan’s death defying bear market of the past twenty years.

We guess the punchline is …

We were insulted!  ;)

This post was edited in collaboration between Jay Gould & Bill Auslander.

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Demand Media has been killing it for four years now. The snapshot from Alexa below show’s ehow.com‘s inexorable rise from Alexa global ranking below 800 to an Alexa ranking of 144 over the last two years.

In the U.S., ehow is the 44th most trafficked site according to Alexa.   Demand has driven this remarkable growth by taking the traditional media concept of “make it and they will come” and turning it on its head, leveraging search data  from the likes of Google and YouTube to understand and then “produce content people demand”.   Understanding what people want is one third of the value equation.  The second part is producing it at a low cost.  Demand accomplishes this through Demand Studios, which counts over 10,000 “qualified” contributors that Demand pays very modest fees ($5, $10, $30 plus potential revenue share) to produce the content.  While some deride this production technique as a content farm (a topic well covered in this recent Time article about Demand where the author says he can make $60/hr) , why argue with success?  In fact, smart people like Tim Armstrong at AOL are trying to copy Demand’s “farming” technique.  The third part of the value chain is the search optimization that lands the content near the top of many long tail search querries (e.g. “how to raise earth day awareness“).

But ehow is just one part of the growing Demand Media empire.  The company had its root in the high margin “direct navigation” business, when they raised their initial round of capital and purchased various domain name portfolios that they monetize with Google search links.  Demand also purchased enom, the second largest domain registrar, after GoDaddy, with over 9.5 million domain names under management in its wholesaling model.  While a low margin business, enom is well positioned to scoop up valuable domain names that are dropped by registrants.    Other Demand Media brands include Lance Armstrong’s LiveStrong.com (U.S. Alexa 722), comedy site Cracked.com (U.S. Alexa 422), and white label social networking platform Pluck.

You have to love the company for so many reasons.  First and foremost is its creativity turning traditional media on its head.  Second, I love companies with a well defined Manifesto that includes tenets like “never rest”.  Third, the CEO, Richard Rosenblatt is a three time winner already.  You can get lucky once, but three successes (iMall acquired by @Home for $565mm, MySpace’s parent Intermix acquired by News Corp. for $649mm, and now Demand) is the mark of a truly remarkable entrepreneur.   And finally, Demand is adding significant heft to its management ranks.

In March, Demand added Yahoo and MSN vet Joanne Bradford as its Chief Revenue Officer.  This week they announced the addition of Peter Guber and Josh James to its Board of Directors.  Guber is an uber Hollywood insider who, in his spare time, teaches a new media class at the UCLA Film School with Rosenblatt.  James is the revered head of web analytic giant Omniture, recently acquired by Adobe for $1.8 billion.

So all this leads to the question of an IPO.  To date, the company has raised over $350 million, the last round at a purported valuation in excess of $1 billion.  The company is rumored to profitable on its $250+ million in run rate revenue.  While the domain business was a large part of the business in the early days, SecondShares estimates that its now less than 40% of the business, and getting smaller everyday.  While the domain name business is not going to garner a very high multiple (see Marchex which trades at about 2X revenue), the content business is on a tear, and Demand shares would surely be in demand in an IPO.  The FT recently reported that Demand had hired Goldman Sachs to explore an IPO.  We’d love to write a research report on the company at SecondShares, but alas, for obvious reasons, management turned down our request for a meeting.  With so much revenue on the table, and so little information about how it falls to the bottom line, we can’t write a credible report without some help from management.   But we like to highlight great companies whenever we find one.

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