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Next Facebook? SecondMarket Ranks Hopefuls

With Groupon on its road show and Zynga readying for an offering next month, investors have been busy trying to buy into the NEXT big thing. SecondMarket, the leading platform for trading private company shares, just issued its third quarter report, revealing which companies accredited investors are interested in now. Demand for private company shares is stronger than ever — last quarter the company completed a record of nearly $170 million in trades, up 122 percent from the year ago quarter.

CEO Barry Silbert attributes the jump to the weak IPO market and growing acceptance of the platform. "It's a great way to bring in new investors, it's a great way to provide liquidity to your shareholders, and it's a great spring training to go public," Silbert said ahead of the report's release.

"SecondMarket's 'rising stars' indicate which startups are gaining momentum in the investor community."

Consumer web and social media companies continue to dominate the platform — accounting for 62 percent of all transactions last quarter. Financial Services companies — new to second market — comprised nearly a quarter of transactions. SecondMarket's 'most-watched' list — its measure of how many accredited investors are tracking a company — correlates to companies headed for the public markets. Facebook, the most-watched venture backed company, is expected to file in the next year or so. Groupon and Zynga, in third and forth place respectively, are expected to start trading in the next month.

So who's the next Facebook or Groupon? SecondMarket's 'rising stars' indicate which startups are gaining momentum in the investor community — the private companies that have seen the largest quarter-on-quarter percent increase in watchers. Turntable, a social music sharing and discovery service tops this list. Thanks to a slew of news coverage, the startup's profile rose dramatically, with a 500 percent increase to 66 watchers. Another company investors increasingly have their eye on is crowd-sourced fundraising site Kickstarter. The startup saw a 148 percent increase in watchers to 228, after topping last quarter's rising stars list.

SecondMarket's 'newbies' list points to hot earlier-stage startups — companies that started the quarter with fewer than ten watchers and gained traction by the end of the quarter. The most popular on this list is a company called Pinterest, with 22 watchers. It allows users to create "virtual pinboards," gathering and sharing images from across the web, and has been drawing a lot of buzz in Silicon Valley. Not far behind is Zaarly, a marketplace for services. Just this week the company announced a large funding round and that Meg Whitman joined the board, so next quarter it's sure to be even more popular.

Who's buying these private company shares? Accredited individual investors did the majority of transactions — both by number of deals and transaction amount. Venture Capital Funds ramped up their spending from very little in the second quarter to 17.5 percent of transactions last quarter. There's no question who's selling — ex-employees are responsible for 64.5 percent of transactions, followed by employees, who were on the sell side for 16.9 percent of deals. Investors and founders are less eager to exist — with 8.4 percent and 3.6 percent of deals respectively.

SecondMarket started measuring which VC firms have companies in the 100 most-watched list last quarter. And both this quarter and last Sequoia Capital, which backed Google, YouTube and LinkedIn, has topped the list, now with 13 portfolio companies on the most watched list. It's followed by Facebook and Groupon investor Accel Partners.

As we await Groupon and Zynga's IPO this quarter, we'll have to see whether trading of private company shares continues to rise as investors look eagerly towards public offerings.

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