May 26, 2011

Should secondaries be the primary comparison?

In the last couple of months there have been some marvelous IPOs and acquisitions happening in the technology space. Facebook’s likely IPO is the elephant in the room but in the meantime there have been some shockwaves with, for example; LinkedIn and Skype.

Secondaries surging !

This has lead to a surge in the secondary trade (i.e. non-public trade between shareholders) of Groupon, Zynga and Facebook equity. Directly this has lead to discussions of regulations and complaints about “opaque markets”, overvaluation etc. I was also lucky enough to attend a number of talks in London over the last weeks, with VCs discussing these and similar issues. One thing I really embraced was the notion of how scarce this type of equity is and thus might merit a higher price.

So what has this got to do with IP? Well to me the same reasoning rings very true for IP and especially investing in IP. Valuation of IP receives a lot of complaints from many people (accountants and academia to mention some) and is seen as something opaque and in need of regulation. There have been many ( more or less unsuccessful) attempts at making the market transparent (e.g. Ocean Tomo, , IP-X, IPXI, Yet2) but nothing has become a de facto standard.

IP Secondaries surging !?

Regardless of this, a large number of IP transactions take place every year (for example Apple/Freescale, Microsoft/Novell, HTC/ADC or of course the never ending Nortel)showing that even without a primary market, the secondary market will give plenty of exit opportunities. The key, however, is that the assets must be of good quality and/or strategic – just as with the equity mentioned above (or have a missed a surge in secondary trading of Lunarstorm or Friendster?)

Then there’s also a constantly growing number of venture/PE backed IP vechicles being set up (how many of you have heard of Juridica, Digitude, IPGest, ?). And of course also some very large vechicles attracting large sums of venture money like Round Rock and RPX. And if that’s not enough, you should really take a look at IV’s investors , if that’s not the cream of the crop, then I don’t know what is and somehow they were able to be convinced to invest without public prospectuses.

So I guess my point is that comparing IP with something transparent and established like the stock market with extremely liquid trading and instant pricing models might not do IP justice. But instead comparing it to the “mysterious” market of secondary investment, where exits are fewer and larger as well as investments being not for everyone but instead for the seasoned players understanding the market.

Based on this I’m actually very interested in two upcoming workshops at CIP Forum next week, where large portfolio transactions and the possibility of a European IP market will be debated. Maybe they will prove me wrong..

Marcus Malek

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