Michael Ewens

What if they had another option? SecondMarket, which operates markets for trading illiquid assets online, is creating a marketplace for trading shares of private companies. It puts investors together with shareholders and collects a fee, which will be 2 percent from each side for the private company market.

Typically, venture-backed start-ups are sold or go public within five to seven years, but lately it is taking longer. As the exits are delayed, venture capitalists who are unable to cash out cannot return money to their investors or devote time and money to new companies. Some employees inside the start-ups, being paid low salaries, get impatient for a payday.

The first real hurdle to setting up such a marketplace is the SEC. There are tons of restrictions regarding equity in private firms. One easy way around one of the rules is to put a middle man between the new owners and the current equity holders. The other substantial problem is transparency. When a VC invests in a entrepreneurial firm, they get to see the books. I am not sure that existing (non-selling) equity holders will want the books opened to secondary firms so that potential buyers can properly price shares. It would be interesting to see how this is handled.

This desire to hit a home run will often cause a VC to manage their portfolio contrary to the best interests of the entrepreneur or their company. In other words, if you are one of the three most promising companies in a batch of ten, the VC may encourage (or force) you to take big risks and swing for the home run, even when a base hit or double is a smarter move. By forcing companies to take inappropriate risks, they do create the occasional home run, but they create many more failures along the way.

This gives me another research idea: follow venture capitalist portfolios over time to see if you can identify this effect.