Exchange for startups

Word on the street has it that Nasdaq is proposing a private market exchange to facilitate buying and selling of venture capital backed startups. Given that the markets have spun unimaginably in the last year and IPO’s have become terribly difficult this is supposed to provide exit options and returns to the risk takers who drive innovation and thus fuel growth in the economy. This is to me is game changing in the venture capital and investing world. This creates an asset class that becomes easily accessible to the retail and the institutional investor.

But is this really an alternate? What really is the difference between a public market like say S&P where I buy and sell stocks compared to a Private exchange where I can buy and sell venture backed companies stocks. One may argue that the difference may lie in the minimum amounts of capital required for trading, the financial disclosure requirements and thus in the risk of the investment by itself. However, isn’t there similar risk of company going bankrupt or stock markets being irrational due to systematic risk factors?

Also a perspective to think about is the pricing mechanism that will determine the initial value of the companies. We are familiar that startups try and create an illusion; example if they ask for $4m in financing and secure $2m, then it raises red flags for the investors. If however, they are successful in raising $2m when they have asked for $1m, then investors usually flock at their doors. In a private exchange this kind of illusion is going to be tough for them to create.

The competition for such a private exchange market is going to be the investment bankers and the OTC market. Will the interest that this possibly thinly traded market be relevant?