There has been a surge in valuations of private technology companies lately as private equity and venture capital firms have poured funding into media darling businesses like Twitter, Zynga and Facebook. Investors are quickly – and quietly – buying shares of these companies in the private markets, hoping that when they do go public, they can profit mightily.
The secondary trading market is where the stock of privately held companies is traded; for example, Web sites like SharesPost and SecondMarket enable users to scoop up stocks in companies before they go public, allowing them to reap hefty returns on investment should that private company have an initial public offering.
In the fourth quarter of last year, transactions at SecondMarket surged from the prior quarter, growing from $75 million to $157.8 million, with the number of participants more than doubling to 35,000.
These rising prices in the secondary markets are reflected in the total "implied value of the companies," according to Bloomberg's Business Week Magazine. A private auction of Facebook shares on SecondMarket this month was so successful that the largest social network in the world is now reportedly worth nearly $70 billion – if the secondary markets are to be believed.
Moreover, private shares of the business networking Web site LinkedIn have been selling at $30 a share on SharesPost, giving the company a valuation of just under $3 billion. Nyppex, a secondary private equity adviser, released a report that stated the total value of Groupon, Twitter, Facebook and other startups shot up 54 percent from June to December of last year.
All of these inflated valuations raise the question: Is there a technology overvaluation bubble growing that's ready to pop? These numbers are all fueled from secondary investing – an area the government does not as tightly regulate – but the recent climb in activity has reportedly gotten the interest of the Securities and Exchange Commission.
The SEC is reportedly seeing further information on private transactions of shares on the secondary market as it works to determine the legality and rules defining the industry. The secondary market has allowed private companies to delay their IPOs for longer periods of time, Seth Levine, the managing director of the Foundry Group, affirmed. "The cachet of going public has clearly diminished from what it was 10 years ago, and instead of rushing to file, they are delaying," he said in a conference call with reporters.