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Valuing Innovation: Is a new stock exchange in our future?

Posted on October 9, 2007

My friend Dave posted an interesting response to Paul Graham’s latest essay on the future of web startups the other day. While the whole post was very thought provoking the conclusion toward the end of the post really hit me. Here’s the conclusion:

so if you could accurately value the business at any time, and you can get an exit at any time, and transaction cost efficiency goes down… then you don’t have to go to a VC for capital. once you start having a liquid, transparent, efficient market, the cost of capital becomes very cheap. and you could just start BORROWING money instead of SELLING equity to raise capital. and when you wanted to sell, you wouldn’t need any expensive VCs or investment bankers, you’d just sell to Mr. Market at whatever rate he’s willing to pay. lenders could accurately value businesses, bet on a rate of success/return, and quickly undercut the cost of capital for VCs.

I had to leave Dave’s signature use of font size, bold and font color in there for effect.

Anyhow, my first thought was simply that we have a market. The stock market is just such an exchange although you still need investment bankers, VCs and the like to have a shot at playing. So it looks like Dave is really calling for a lightweight stock exchange.

Perhaps this new exchange could take the nasdaq one step further and be a completely lightweight web based service. Of course metrics are the key to this new idea.

Metrics are an important part of just about anything and a new exchange, to be efficient, transparent and liquid would need a good set of metrics for investors and companies to use in valuing their businesses.

I am going to start thinking more on this (putting my finance degree back into use baby!) because I think it is an interesting idea and one that may be possible to execute. Most likely the debt markets for entrepreneurs would be the first thing to start improving with a market that would follow. Are there any bankers out there? How could you see a debt market for startups and metrics around that market shaping up?

Of course the big issue is that start-ups, and innovation in general, is very risky and that is why bankers are adverse to lending to those types of companies. At least with a shipping company the business is easy to understand and the bank can take leins against all of the trucks and other assets which can then be used to get their money back in a default situation.

With web startups in particular what hard assets are there for the bank to take a lein on? The technology/IP is really all there is and that may not have much residual value after a default.

Either way a new market for startups is very compelling and I am convinced there might be a way to make it happen. I am just not sure how right now.

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5 Comments so far
  1. dave mcclure October 19, 2007 11:40 am

    >>Perhaps this new exchange could take the nasdaq one step further and be a completely lightweight web based service. Of course metrics are the key to this new idea.

    AARRR!

    right on target eric :)

    - dave

  2. Eric Olson October 19, 2007 1:00 pm

    Ahoy Dave! I have been looking more into this idea and it seems like one of the big hurdles that would need to be leaped first and foremost would be working with the SEC.

    The SEC would have to regulate this type of exchange and if you went ahead without that regulation you would probably be fined lots of money by the SEC and you’d still, at the end of the day, have to be regulated.

    It suuuuuuucks that it has to be that way since it restricts innovation but such is life.

  3. Stock Market Watcher February 26, 2008 5:54 pm

    new stock market for start-ups? the VC’s have a squeeze on that market but it could open up, maybe. of course, we would need full disclosures and reporting otherwise it would resemble the pink sheets.

  4. US Share Market March 5, 2008 10:26 pm

    Either way a new market for startups is very compelling and I am convinced there might be a way to make it happen.

    It’s interesting to think about merging an idea like this with something like Prosper.com.

  5. […] fact, I actually wrote about a related topic back in October 2007 in response to my friend Dave McClure’s post. Dave argued that a market should be developed […]