The private market exchange has been a platform for the buying and selling of restricted shares, mostly of high-growth social media companies such as Facebook, LivingSocial and Zynga Game Network. And with a global scramble to own a piece of social media at any price, the exchanges have flourished.
SharesPost, the leading private exchange, says it concluded more than 600 transactions involving 30 companies in the eight months ended August 31. In all of 2010, SharesPost completed only a few dozen transactions, says David Weir, chief executive officer of the San Bruno, California–based marketplace.
Now, SharesPost is stretching its capabilities. It has announced that it helped raise $200 million for TrueCar, a Santa Monica, California, web-based car seller, in what is one of the first primary capital transactions on these exchanges.
“It was one of the easiest transactions I have been involved in,” says Scott Painter, chief executive of TrueCar and a serial entrepreneur. Painter, a managing partner of Brighthouse, a Santa Monica firm that incubates and seeds early-stage companies — and a founding investor in SharesPost — says the transaction was surprisingly streamlined, without much of the paperwork that such placements have involved in the past. He has been involved in 37 start-ups in 25 years. Although Painter eventually had to meet prospective investors face-to-face, the preliminary work of identifying investors, contacting them and qualifying them through SharesPost was far less cumbersome and time-consuming than through more-conventional placements. The entire transaction, from start to finish, took four months, says SharesPost’s Weir. Were it not for a delay caused by TrueCar, the process would have been even shorter.
Still, it was a complex transaction. TrueCar sought to achieve three goals: transform a disparate set of stakeholders with varying stock preferences into common-stock holders; attract fresh capital to accelerate TrueCar’s growth en route to an IPO; and provide $35 million in liquidity to some existing shareholders and more than a dozen senior employees who might otherwise have left.
Painter launched TrueCar in 2003 with his own capital, then raised more than $100 million over the next eight years from an assortment of investors. Even though the company had $25 million in cash at the end of 2010, Painter says he felt it needed a large infusion of new capital for growth as well as for acquisitions. TrueCar has already made three acquisitions: It purchased Carperks, a provider of automotive leasing and purchasing programs; Automotive Lease Guide from DealerTrack; and Honk.com from News Corp.
TrueCar, which raised its first round of venture capital in 2004 — a $5 million financing from Santa Monica–based Anthem Venture Partners — became profitable in 2009 and has been profitable and has made money ever since. But TrueCar needed to move from company-building to growth and acquisitions. Although it had revenues of $40 million in 2010 and expects revenues of $80 million for this year, it has just 1.3 percent of the market, says Painter.
Nevertheless, he is convinced that TrueCar’s business model is sustainable because its revenue is based on actual transactions rather than advertising. Car dealers in its network pay TrueCar $300 for every new car sold and $400 for every used car. TrueCar wants to provide the financing for car buyers who look to lease and buy from its network of dealers.
The $200 million in new capital comes from existing investors such as Capricorn Investment Group, GRP Partners and USAA. But there’s also a slew of new investors, including Allen & Co., GSV Asset Management, International Investment House, Keating Capital, McCombs Enterprises and Passport Capital. For the moment, TrueCar has all the capital it needs. But its next financing milestone is an IPO. Private exchanges such as SharesPost have given high-growth companies more financing options, says Painter, but for companies like TrueCar that rely on consumers, an IPO offers visibility and brand exposure that no amount of marketing can provide.
Because companies are staying private longer, their need to be able to access growth capital from new sources and provide their shareholders with a liquidity mechanism is becoming more acute. SharesPost’s ability to raise primary capital for expanding and late-stage growth companies, combined with its platform for providing private company shareholders with liquidity, offers a much-needed bridge between the venture capital ecosystem and the public stock markets.
