Liquidity Event: Any transaction (historically IPO or sale) that enables (VC) investors in start-ups to recoup their investment and turn a profit.

Liquidity Event: Any transaction (historically IPO or sale) that enables (VC) investors in start-ups to recoup their investment and turn a profit.

The best events involving liquid that Pocket MBA ever enjoyed were an extended squirt-gun fight in Boston earlier this summer with a friend's twin sons and a recent outing with some colleagues aboard a river cruise boat around New York Harbor. Not only was the boat in water, but there was an open bar. That's like a double liquid event. But of course, neither of these were Liquidity Events. Arguably, however, this issue of Pocket represents a liquidity event. Say huh?

A liquidity event is simply any event (and the type of event doesn't matter) that enables investors in a speculative venture to get their money back. This 250th issue of the newsletter, which also marks the last issue of what will soon be Pocket MBA 3, the Book, is a liquidity pre-event of sorts for PLI. As the newsletter costs something to produce and nothing to subscribe to, and as PLI is kind enough to remunerate its author for writing it, the books are the vehicle by which PLI recoups its investment. And while this doesn't comport with the traditional deal-route to cashing out (alas, PMBA, Inc. is still but a pipedream), those ways may be shifting anyway, as there are murmurs in the VC community that the old ways of doing things (IPO or sale) are not working quite as they have in the past. Thus, it's time to look for new kinds of liquidity events, though book publishing is surely not one of them. Facebook, The Book doesn't seem like a good pay off for the social networking website's backers--still, a paperback or two couldn't hurt.

Anyway, liquidity events are time-honored ways for investors to cash out of start-ups. That's why liquidity events are also called "exit strategies." The VC guys or gals who lined up (there may or may not have been a line) to invest in Google way back when did so with an eye toward getting out of the business eventually. And they got out handsomely when Google went public. Another way of exiting is selling the company to another public company. A fledgling company might also recapitalize itself, which is just a fancy way of saying it restructured its debt/equity mix. So a company could take an investment from a private equity group, which would pay off the investors and then the private equity group might then also have its own exit strategy of IPO.

The liquidity event concept is very simple. So why make an entire issue about it? Well, the liquidity event may be undergoing a sea-change. The IPO market hasn't been ablaze for start-ups in a long time. Some deals go through, but the halcyon days of the mid-to-late 1990s may never return. Thus some commentators have called for new approaches to liquidity events that look beyond the IPO or sale-to-public-company route. And the answer may be the advent of the private trading system. GS Tradable Unregistered Equity OTC Market (GSTrUE, begun in 2007 by Goldman Sachs) and Opus-5 (started earlier this year and run by a consortium that includes Morgan Stanley, Lehman Brothers, Citigroup, Merrill Lynch and the Bank of New York Mellon), represent two investment-bank backed efforts to find new ways to liquidity. These are private trading systems that would allow VC investors to sell shares to interested investors outside the registration requirements of the securities laws (by dint of SEC Rule 144A, which permits such activity provided various limitations are met). The GSTrUE system is explained in The D&O Diary blog:

The idea behind the market is to allow private firms to raise money and create a way for their executives to cash out, without the burden, expense, delay—or scrutiny—of registering shares or taking on reporting responsibilities. The Goldman Sachs exchange is private and unavailable to individual investors.

With these new systems, the VC investors don't have to worry about slow IPO markets or companies fearful of spending money to buy still-speculative start-ups. With GSTRuE, they have their own trading system unburdened by the vicissitudes of the regulatory system. Pocket MBA predicted a while back that once the run-of-the-mill investor learned about getting in on IPOs, then learned about hedge funds and then private equity, the sophisticated institutional investor would run for cover somewhere else. There's just no serious money to be made when the public is in on something. This new liquidity event strategy is an indication that the next process is under way. Whether this is good or bad, Pocket MBA leaves to those more knowledgeable. Still, it seems easier to just publish a book and sell a few copies.