In the secondary market, stocks are discounted by 40% on average, according to an industry pro

In the secondary market, stocks are discounted by 40% on average, according to an industry pro

Earlier today, we spoke with Phil Haslett, co-founder and now Chief Strategy Officer of EquityZen, a 10-year-old New York-based secondary marketplace that connects accredited buyers to private company stocks that their owners – including founders, employees, and VCs – looking to sell.

It’s a tough business to manage right now, competing with shares of publicly traded companies that are selling at rock bottom prices compared to a year ago and are much more liquid. Indeed, like many outfits, EquityZen last month carried out a significant layoff, parting ways with 27% of its then 110-person team.

Still, Haslett firmly believes that the secondary market will only grow over time. . once he gets over that really big bump. More on what he sees on prices, hot and cold sectors, and more follows below in excerpts from our chat, slightly edited for length.

TC: The market was completely stalled in June, with tons of requests to sell secondary stocks, but not many buyers, as people sat on the sidelines figuring out just how bad things were going to get. What’s going on right now?

PH: Markets were pretty stagnant from April to maybe July or August due to a combination of factors, the biggest being sellers’ price expectations where buyers really wanted to get into the names . I’ve definitely seen an uptick. Mainly I think what we’ve seen is that reality sets in to sell shareholders on price and also more buyers are coming into the secondary space to find investments in names they like , because primary increases do not occur at all. If you have a lot of capital to deploy and want to invest in cutting-edge technology, [and founders aren’t prepared to raise primary rounds] with a 40% discount on their last funding cycle, [investors] cross into the secondary space.

Yet you are competing with publicly traded companies that are also very heavily discounted right now. In terms of trading volume, how does it compare to a year ago?

I think any secondaries platform or market participant would tell you that 2021 has been a unique era for secondaries; probably no one comes close to making the volume they did last year. [You’re right that if] you’re an investor, you might say, “There’s a very liquid solution that allows me to buy companies that are generating five times or even three times the revenue in the public markets, so why should I enter the space private ? But once you’ve exhausted those opportunities, [the question becomes]: what are the names of private companies that you still really believe in for a long time? And how can I, as an investor, deploy capital into these companies?

What are the “hottest” brands on your platform right now?

Unfortunately I can’t share the actual names if you are curious about the most important sectors, until Q2 we were quite active in Web3 and crypto companies; it’s obviously gotten really quiet lately. Fintech fell from a year ago. A consistent sector has been in cybersecurity; public name companies like CrowdStrike and Sentinel One and Zscaler and Palo Alto Networks have done very well and that kind of flow trickles down to the private space where there are plenty of well-capitalized private companies solving for a cybersecurity solution. Enterprise SaaS companies are still doing well, but [selling based] on a much more cautious multiple on revenues than in the past.

Do you see stocks restricted by companies that don’t want people to know that their secondary stocks are selling at a huge discount to their last known valuation?

We’ve seen a bit of the opposite, which seems counter-intuitive, but you have two opposing forces: VCs and founders may be reluctant to have an active market that shows prices have fallen gap by employees and early investors who were thinking of a liquidity event this year or next year through an IPO and have been completely shut out but have cash needs independent of company performance . Also when a story like DataRobot comes out where a team of senior executives got a bunch of cash when things were good and they didn’t extend that to employees [who are dealing with the current market]it’s a complete egg on your face.

You work with a lot of founders and employees. Do you also manage institutional-type businesses? If a VC wants to sell a percentage of their entire portfolio to another buyer, can you handle that?

We work with institutions; we work with venture capitalists who are buyers and sellers. I would say the trend we’ve seen so far this year is of seed-stage funds that have positions in their portfolio that have done extremely well for them and are marked up and could probably bring the full value of the funds [ and they’re liquidating] part of that position so they can return the capital to their LPs. If you are a seed fund trying to raise a new fund with no realized gains, this is a tough conversation. Now do they wish they had [sold a portion of those holdings] Last year? I’m sure they do.

Of course, no one wants to catch a falling knife. Have you seen a price rebound or is the trend still down?

The current average discounts compared to the previous funding round we’ve seen right now are around 40%, which is the lowest we’ve seen. In the first trimester, it was probably closer to 20%. It’s name specific; some stocks are 80% off, some of them are selling for 10% off. It all depends on what that last lap looked like. If you raised 100x SoftBank’s revenue in 2021 in a very competitive cycle, we’re seeing over 40% discounts compared to companies that raised capital in the first or second quarter of this year at a higher level. “comparable”. valuation, where you might see a more modest discount.

I wouldn’t say we’ve seen a rebound in valuations. I will say that the downward acceleration is slowing down, so we don’t see stocks going from 40% to 60% immediately. And so I guess if more transactions start happening in that 40% range, especially involving big institutions and well-known institutions, that may indicate that we’re either going to sit at that level or we’re going to start bouncing back . [But] a large part remains dependent on the performance of public markets. If we continue to see the Nasdaq drop another 5% to 10% and high beta names in the public markets drop another 20% or 30%, you’ll see [share value] in the secondary markets continue to decline.

How much has EquityZen raised from VCs over the years?

Just under $7 million. We are a very boring company when it comes to venture capital. We last raised funds in February 2017. We really relied on the business model and profitability of the business to reinvest and grow.

I’d say that’s probably the hardest thing we’ve had to do here at EquityZen, by far, letting go of really, really good people. [last month]. But the advantage of being a company that hasn’t raised too many outside funds is that it’s a decision we made when we wanted to. It wasn’t something a council told us we had to do before the XYZ date.

One of your competitors, Forge Global, went public in March through a SPAC and its timing didn’t help, but its shares are trading at $1.33. Its market capitalization is only $230 million, which is less than the $238 million that investors invested in the company when it was still private. How does this impact how you think about next steps?

We are still only in the first rounds. We want to be able to continue to bring private markets to the public. And if that means it’s doing it as a public company, that’s fine. If that means doing it as a private company, that’s fine too. If that means doing it as part of a bigger financial services company, that’s okay too, as long as we can keep working on it. We have around 250,000 accredited investors on the platform. To date, we have completed transactions with just over 400 private technology companies. I really think we’re just beginning to scratch the surface.

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