Facebook's Market Cap is... Interview With Jeremy Smith from SecondMarket

SecondMarket is an exciting and rapidly growing Wall Street firm which has created a marketplace for illiquid assets. SecondMarket's 10,000+ participants manage over $1 trillion in investable assets and include global financial institutions, hedge funds, private equity firms, corporations and high net worth individuals.

On the firm's auction platform, investors can receive competitive bids and offers on a wide range of illiquid assets. The products traded on SecondMarket range from Asset-Backed Securities and Bankruptcy Claims to Private Company Stock and Restricted Stock. So whether you are looking to offload a complex, exotic security or buy shares of Twitter or Facebook, SecondMarket is the place.

Furthermore, the firm prides itself on bringing transparency and integrity back to the securities markets - something that has been sorely lacking on Wall Street. SecondMarket's innovative and entrepreneurial pedigree has put it on the fast track to success in the financial markets.

The company's founder Barry Silbert was a category winner of Ernst & Young's Entrepreneur of the Year Award, a winner of Crain's Entrepreneur of the Year award and was included on Treasury & Risk's list of the 100 Most Influential People In Finance. He also was recently recognized by Fortune as "One to Watch" in the publication's annual 40 under 40 issue.

In addition, SecondMarket was named the top start-up in the entire Northeast by AlwaysOn Media and was named one of the Top Fifty Tech Startups You Should Know by BusinessWeek. SecondMarket's Chief Strategy Officer, Jeremy Smith, was nice enough to grant Benzinga an exclusive interview. A short transcription of our conversation along with the podcast can be found below.

This interview is also available as an episode of the Benzinga Podcast.

Could you give our listeners a brief overview of SecondMarket?

SecondMarket is a centralized transparent marketplace for the buying and selling of illiquid assets. So essentially you have the various things that are traded on exchange, equities, debt, commodities, and then there's everything else. Everything else is where SecondMarket is involved. We were founded in 2005 with one asset class traded over SecondMarket, namely restricted securities in public companies, things like restricted stock, warrants, convertible debt, etc. Since then we've launched half a dozen other asset classes, one of them being private company stocks. Stock in sexy startups like Facebook, Xanga, Twitter, and LinkedIn trade over SecondMarket even though they're not public companies yet.

What was the genesis for the idea behind SecondMarket? What sparked Barry Silbert to conceive of this company?

Barry and I worked at a boutique investment bank. Barry was working at the restructuring division at the time. He helped clients restructure clients that were going through bankruptcy. Barry was on really big cases: WorldCom, Enron. He was traveling around trying to help these companies dispose of these assets. As Barry was trying to find buyers for these varieties of illiquid assets that these bankrupt companies held, he said to himself there's got to be a better way. How come there's not a centralized marketplace where you can buy and sell these assets. That's when the light bulb went on and he went on to create SecondMarket.

Can you talk a little bit about the participants that are currently trading on SecondMarket? What are the requirements to participate?

Anybody can sell. Anybody can sell their assets on SecondMarket. But, in order to buy, because we are a regulated entity, there are rules and regulations as to who is allowed to purchase these illiquid assets. The only people who are eligible to purchase are what are called accredited investors, qualified purchasers, and qualified institutional buyers. In other words, wealthier, more sophisticated investors. These are built into the regulations to protect the more unsophisticated investors from getting in over their heads on some of the more complex asset classes.

I'd say about a third of our participant base are high net worth individuals. Another third are hedge funds. The other third are the vast array of alternative investors out there, from family offices to endowments to pension plan to VC firms to PE firms, prop desks, global financial institutions. Those participants make up the other third of our participant base.

What are your most popular products? What is the dollar amount in transactions for your most popular products?

The structured products, that is auction rate securities, mortgage backed securities, CDOs, asset backed securities, are currently our biggest marketplace. It represents somewhere south of 50% of our revenue. Then we have our private company stock market, which is our next biggest, but is by far our fastest growing marketplace. At the beginning of last year we had done a few million dollars in transactions and now we are closing in on $300 million in transactions. The private company stock market has really been accelerating. Although I can't speak specifically I can't say what dollar values are attributed to each of the markets, I will say that overall SecondMarket has done over $3 billion in transactions in illiquid assets. Two-thirds of that has come in the last 15 to 18 months.

I'm sure you get asked this quite frequently, but what is Facebook?s market cap according to transactions taking place on SecondMarket.

People do ask this all the time. We?ve been asked by all the companies to not comment on their values. You've definitely seen it out there in the public, and it's probably been associated with where the companies are trading at on SecondMarket, but as corporate policy we don?t comment on the values of specific companies.

But suffice to say that there is good amount of excitement for Facebook still.

Absolutely. Of the $250-$300 million of private stock transaction, over $100 million of that has been Facebook.

What are the revenue generation streams for SecondMarket? How do you get paid? What are your growth plans in this area?

The primary way we make money is through success fees. In other words it's free to list things for sale, to see what's available for sale, to place bids, to see some of the data that we have on SecondMarket. The only way we get paid is when a transaction is successfully consummated between a buyer and a seller. We get a percentage of that transaction. Having said that, we have a number of things in the works, other revenue streams we are working on. For example, data. We are a nexus for a lot of data in the illiquid assets universe. We not only continue to aggregate that data, but slice and dice it so we can monetize all that information.

In terms of growth plans, there's three primary methods. One, of the existing asset classes that we have, in aggregate these are trillion dollar asset classes. Just keep on pounding away at these asset classes in and of itself is a tremendous growth area. The other two areas, one is adding new markets. It is our intention to add one to two new markets a year, and we have a couple coming up later this year that will be fairly exciting. The third way is geographic growth. Right now we have a business development team in Hong Kong who are exploring opportunities in Asia. We a couple people internally focusing on Israel, primarily on the private companies market.

Who are your competitors?

There is no company out there that has created markets for the number and variety of asset classes that we have. There are a couple of websites that say they're doing that but if you know the markets you know that they're really not actually doing any transactions. But in terms of our individual markets, some of our markets don't have any pure-play competitors, but others certainly do. For example our LP interest market, there's a company called NYPPEX. There's also one called Cogent, but they're more of an investment bank.

Benzinga is a young, growing company, and we're interested in your advice. SecondMarket is perfect because you've been so successful; you been growing so fast and started with a tremendous idea. What would your advice be for a company like ours in order to provide the best possible product for our readers and listeners?

It's funny you mention product because you were asking the question where I was going to take it. I'll give two bits of complete conflicting advice but it's important to take both of them. And that is listen to your customers, but innovate yourself and don't worry what they have to say. What I mean by that is, listen to what your customers need, but don't ask them how to get you there. All they know is they need to get to Philadelphia; they're in New York and they need to get to Philadelphia. Don't ask them how they should get there. You need to figure that out yourselves. If you look at some of the greatest innovations, be it the iPhone or whatever it might be. They didn't do 40 focus groups and then test these things on various audiences. It was innovation at its core, it was innovation coming from the mind or minds of one or a few people. They didn't try to get their customers to tell them how to get there. Once I knew what my customers are trying to do, I'm going to innovate, because I'm the best company to do it. So listen to your customers but at the same time you have to rely on your own innovation to bring them ultimately to where they're trying to go.

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