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No Exit

One of the more salient features of the current financial environment is illiquidity, a feature which has largely been associated with the credit markets.  However the liquidity problem has infiltrated the private equity marketplace as well.  Though still well capitalized and continuing to invest, on the horizon looms the question for the VC/PE community of how to cash out.  Without an IPO market, investors are left hoping for strategic transactions, yet the crisis of value we are witnessing throughout the markets makes this approach increasingly difficult to engineer.  Without reliable comparables or cash flow projections, the VC/PE community faces an uncertain but potentially very lengthy time horizon for committed capital.  A significant pullback in VC/PE activity is now expected in 2009. 

We believe one of the keys to restoring vibrant and liquid capital markets lies in the development of alternative means to liquidity. We believe that social technologies hold the key to the development of such alternatives, whether in the form of entirely new classes of financial instruments, or, in particular, a highly liquid, socially networked capital marketplace. We need look no further than the consumer lending space where P2P technologies are revolutionizing the way individuals gain access to debt capital.  These technologies could be readily adapted to the development of an equity capital market.

Several ideas currently in their infancy offer a glimpse into future "socialized" securities markets.  We see the movement toward a social, "wisdom of crowds" approach to investing currently underway.  Companies such as kaChing and Covestor offer the ability for investors to establish track records and to leverage their expertise by managing actual portfolios.  In addition, markets for "virtual shares" in start-ups, private companies, and even standalone applications have sprung up, and include TradeVibes, exchangeP, and AppBroker.  We are also watching with great interest developments in the virtual goods/microtransaction space for potential capital market applications. We believe these ideas and others signal the beginning of a significant industry shift.   

Given the current upheaval on Wall Street, the need for investor liquidity, cries for a new financial regulatory regime, and ongoing innovation in the social technology space, the stage is now set for profound disintermediation in capital markets. 

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Finance 2.0

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