Facebook – Maybe Next Time…


By the time you read this Facebook should be trading on the NASDAQ. Shares were supposed to open at around $38, indicating a market value as high as $104 billion.

In reality, the company’s shares have already been trading for years in the secondary market, on both SharesPost and SecondMarket’s platforms. Facebook halted trading therein at the end of April to prepare for it’s road show and “settle” the market.

Secondary markets, in case you aren’t familiar with them, exist to provide liquidity for non-publicly traded securities. Facebook share trading has dominated these platforms for the last several years, but you could also have bought Twitter shares, LinkedIn, Groupon and quite a few others. They also actively trade restricted public securities.

It’s a growing business, although still just a blip compared to the public markets. SecondMarket transacted $268 million or so this past year in private share transactions. They also raised $13 million for themselves through their platform… nifty trick!

Lou Kerner, a former analyst who’s done stints at Wedbush Morgan, Merrill Lynch and Goldman Sachs, has recently been tapped to head up a new private share trading platform for Liquidnet. He said this about his new gig: “We’re at the beginning of the emergence of this new asset class. With the emergence of the secondary market you can attract all the capital you want without going public.”

But the public market is STILL the ultimate destination for liquidity – as you’re likely witnessing first hand with Facebook’s IPO today!

I’m not going to opine on whether or not I think “late to the party” Facebook IPO investors will make money. The company is an anomaly, I don’t think many comparisons exist and I don’t consider myself smart enough to know what the proper valuation is.

A company with more users than the population of the US, Europe and Japan combined (over 900 million) has to be valuable. Those “users” represent real and potential revenues. How valuable those users are is the question that eludes even some of the brightest tech analysts. If they can’t figure it out, I’m sure not going to try.

Ultimately the market will assign the correct value to the company’s shares, whether it’s $1, $100 or $1,000. After all, things are worth what someone else is willing to pay you for them.

Early investors made the fortunes

What I want to emphasize herein is WHO, besides the founders, has already gotten rich with Facebook (and LinkedIn, Groupon, Pandora, etc…).

Early investors, that’s who. The seed money (most) always cleans up when a deal goes big time.

Facebook’s backers included Goldman Sachs, Peter Thiel, Chase Coleman from Tiger Global, Accel Partners (with over 200 million shares – staring at a potential 1000x ROI) and Russia’s DST Group. ALL of these investors have decided to sell significant portions of their stock in the IPO.

In fact, existing shareholders are selling 241.2 million shares of the 421.2 million being offered today.

Why? Because as Sam Hamadeh, an analyst from PrivCo said recently, “…This company has been priced for perfection and then some. It’s going to be very difficult for them to live up to that.”

They’re gettin’ out while the gettins’ good!

Here’s my favorite quote, from Alan Patrick, co-founder of technology consultancy Broadsight: “I imagine the shares will enjoy a huge rise on the first day of trading. There are always ‘greater fools’ prepared to buy at a higher price.”

Yep, greater fools… this is what sophisticated investors count on.

Take Peter Thiel for example. Peter was one of the earliest investors, getting involved way back in 2004. He put up $500,000, which was structured as a convertible loan and eventually turned into 10.2% of the company. That stake today will bring him over $2 billion. Anyone with half a brain would be dumping at least some of their shares, and Peter’s got a lot more than half a brain.

Closer to home, a good friend of a good friend of mine participated as an early investor in Groupon. This chap took a $100k investment and turned it into $15 million… and that was after tendering only HALF of his shares in a later financing round. I don’t know if he sold into the IPO, but I’ll be willing to bet he did.

Early investors in Google, Instagram, LinkedIn… all have had spectacular pay days.

So, how do WE gain entry into that exclusive club?

Well, sorry but most can’t. The regulators insist that you’re accredited, which is defined here, first and foremost. Chris and I have already told you how we feel about the government telling adults what they can and can’t do with their own money. Resistance is futile, you just have to find ways to work within the system.

I told you about one way when I wrote about Multiplying Your Money Like “THEY” Do!

Early stage private deals that are primed to go public at some point are the best way we know of to realistically multiply your capital, but unless you’re a Silicon Valley VC, run an incubator, or just happen to be well-connected, your odds of seeing a Facebook-type deal are slim.

This is one of the reasons we like the crowdfunding space so much. It’s a long way from becoming mainstream, but the success of platforms like Kickstarter makes it obvious that the public is keen to get involved, and there is clearly a business there.

My interview with Nick Bhargava, CEO of Motaavi, a new crowdfunding platform, showed us how one company plans to make money in the space.

Somewhere between crowdfunding and billion dollar VC deals there is a niche opportunity.

A lot of our readers are high-net worth investors, run family offices, or manage small hedge funds. We get a lot of inquiries asking what we’re doing with our own capital.

We’ve talked about our frontier markets adventures in Mongolia, Nepal, Africa and elsewhere. We also mentioned a few forays into technology ventures and incubators. We haven’t gotten too in-depth on these, mainly because there are restrictive regulatory barriers that prevent us from doing so, even though we aren’t brokers nor are we compensated for our opinions.

Neither are we newsletter writers hustling information to a bunch of weekend warriors for $399/year. Whoever thinks they can buy financial independence for the cost of a nice meal out with a decent bottle of wine needs to re-examine their strategy.

Getting on the ground and establishing high-level contacts is a necessity. Sure, you may get lucky once in a while, but longer term you’re taking a lot of risk if you’re not willing to do the difficult work.

Chris and I live this lifestyle. I’m a perpetual traveller, and in the last 60 days I’ve been in 7 countries, one of which I plan to make a new part-time home (I’ll write a LOT more on that over the next few weeks). I’m constantly being exposed to unique opportunities that aren’t ever going to make it into some monthly newsletter.

Fact is, a lot of the guys that write these letters turn to people like Chris and I, who are out there in the field, when they need boots on the ground intel.

So, with that in mind we’re about to offer a very unique, very exclusive opportunity to a limited number of individuals who want to know more about what we’re doing with our capital. I sent a letter to our readers a couple weeks ago discussing this.

Anything Chris and I put our name on is going to be top notch. If you’re an accredited investor, money manager or focused on private equity, we want to hear from you. Click here to confirm if you are accredited and we’ll send you more information.

- Mark

“I made a resolve then that I was going to amount to something if I could. And no hours, nor amount of labor, nor amount of money would deter me from giving the best that there was in me. And I have done that ever since, and I win by it. I know.” – Colonel Sanders, founder of KFC