Earlier today, we spoke with Phil Haslett, the co-founder and now chief strategy officer of EquityZena 10-year-old New York-based secondary marketplace that connects accredited buyers with private company stocks that their owners — including founders, employees, and VCs — want to sell.
It’s a tough business to run right now because it competes with shares of publicly traded companies that are selling at extremely low prices compared to a year ago and are much more liquid. Indeed, like many outfits, EquityZen ran one last month big layoffsaying goodbye to 27% of the then team of 110 people.
Still, Haslett firmly believes that the secondary market will only get bigger over time. . once it gets over this very large hump. 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 stuck in June, with tons of demand to sell secondary stocks, but not many buyers because people sat on the sidelines trying to figure out how bad it was going to get. What happens now?
PH: The markets were quite stable from April to maybe July or August due to a combination of factors, the biggest of which was the price expectations sellers had that buyers really wanted to get into. I’ve definitely seen an increase. Mostly I think what we’ve seen is the reality of shareholders selling on price and also more buyers coming into the secondary space to find investments in names they like because there’s no primary increases at all. If you have a lot of capital to spend and you want to invest in advanced technology, [and founders aren’t prepared to raise primary rounds] with a 40% discount on their latest funding round, [investors] cross over to secondary room.
Yet you compete with listed companies that are currently also very heavily discounted. How does it compare in terms of transaction volume to a year ago?
I think any secondary platform or market participant would tell you that 2021 was a unique era for secondary; probably no one will come close to the volume they achieved last year. [You’re right that if] you’re an investor, you might say, “There’s a really liquid solution where I can buy companies that bring in five times or even three times the revenue in the public markets, so why enter the private space?” But once you’ve exhausted those chances, [the question becomes]: What are the private company names that you really believe in for a long time? And how can I, as an investor, invest capital in those companies?
What are the ‘hottest’ brands on your platform right now?
Unfortunately, I can’t share real names if you’re curious about sectors that are most prominent. Until the second quarter, we were quite active in web3 and crypto companies; that has obviously gone very quiet lately. Fintech has retreated compared to last year. Is a consistent industry in cybersecurity; Public names like CrowdStrike and Sentinel One and Zscaler and Palo Alto Networks have done really well and that’s ending up in the private space where many well-capitalized private companies solve a cybersecurity solution. Enterprise SaaS companies are still doing well, but [selling based] on a much more conservative multiple of revenues than in the past.
Do you see stocks restricted by companies that don’t want it known that their secondary stocks are being sold at a massive discount to their last known valuation?
We’ve seen a little bit of the opposite, which sounds counterintuitive, but you have two opposing forces: Venture capital firms and founders may be hesitant to have an active market showing that prices have fallen compensate by employees and early investors who thought about a liquidity event through an IPO this year or next year and who are completely locked out but have cash needs that are independent of the company’s performance. Even when a story comes out like that of DataRobot, where a team of senior leaders is a hope liquidity when things were great and they didn’t extend that to employees [who are dealing with the current market]that’s a whole egg on your face.
You work with many founders and employees. Do you also handle institutional type trades? If a VC wants to sell a percentage of their entire portfolio to another buyer, can you handle it?
We do work with institutions; we work with venture capital firms who are buyers and sellers. I would say the trend that we’ve seen so far this year is early stage funds that have some holdings in their portfolio that have done tremendously well for them and that have been marked up and can probably see the full value of the fund repay [ and they’re liquidating] part of that position so they can return capital to their LPs. If you’re a fund in the early stages of trying to raise a new fund with no realized gains, that’s a tough call. Now, 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 an uptick in prices or are things still falling?
The current average discounts from the previous round of funding that we’ve seen right now are around 40%, which is the lowest we’ve seen. It was probably closer to 20% in the first quarter. It is name specific; some stocks are sold at 80% discount, some are sold at 10% discount. A lot depends on what that last round looked like. If you raised 100x revenue from SoftBank in 2021 in a really competitive round, we see discounts well over 40% compared to companies that raised capital in the first quarter or two of this year at a more relatable valuation , where you may see a more modest discount.
I wouldn’t say we’ve seen a rebound in valuations. I will say the acceleration is slowing down, so we don’t see stocks moving from 40% to 60% immediately. And so I suspect if more transactions are happening in this 40% range, particularly at large institutions and well-known institutions, it could indicate that we’re either going to sit on this floor or we’re starting to bounce back. [But] much of it remains dependent on performance in the public markets. If we continue to see the Nasdaq drop another 5% to 10% and the high beta names trade at 20% or 30% in the public markets, you’ll see [share value] in the secondary markets continue to fall.
How much has EquityZen raised from venture capital funds over the years?
Just under $7 million. We are a very boring company when it comes to supporting businesses. We last raised money in February 2017. We really trusted the business model and profitability of the company to reinvest and grow.
I’d say it’s probably by far the hardest thing we’ve had to do here at EquityZen, letting go of some really, really good people [last month]. But the advantage of being a company that hasn’t raised too much outside funding is that it was a decision we made when we wanted to make it. It wasn’t something that some board told us to do before XYZ date.
A rival of yours, Forge Global, went public on a SPAC in March and the timing didn’t help, but the stock is trading at $1.33. Its market capitalization is only $230 million, which is less than the $238 million investors put into the company when it was still private. How does that affect how you think about next steps?
We are still very much in the early innings. We want to be able to continue to bring private markets to the public. And if that means doing it as a public company, that’s fine. If it means doing it as a private company, that’s fine too. If that means doing it as part of a larger financial services company, that’s okay too, as long as we can keep working at it. We have about 250,000 accredited investors on the platform. We’ve transacted in just over 400 private technology companies to date. I really think we’re just starting to scratch the surface.