The markets never cease to keep me on my toes and the current economic environment is no exception. Fundamentally, factors that impacted us all have not spared the private markets. War, geopolitical instability, inflation, rising interest rates, and market volatility have increased the cost of capital and narrowed exit paths for private, growing technology companies. Given that public and private markets are interdependent, it hurts when the public market is down and helps when the public market is up. Thus, the meaningful sector-wide correction in public equities has further hurt private market valuations but it has also uncovered opportunities. These opportunities further my conviction that the private markets will continue to grow and that today’s environment presents a unique moment for both shareholders and investors.
So what does this mean for the state of the private market? Consider what happens in a market shock:
Investors
Investors pause, reevaluate, and reenter depending on their strategy. Some may wait and see, while others submit low-ball bids, or deploy capital at reasonable levels. EquityZen has seen investor behavior across this spectrum with investment interest returning at lower levels.
Sellers
Over the last decade, sellers were rewarded for adopting the “wait and see” strategy. During that period, the typical seller who waited 3 to 6 months to sell was presented with a higher bid. This time is different. In Q1’22, bids paused as they do with every shock. Now, over six months since then, bids have started to come in but at lower valuations. Sellers are confronted with a new reality – the "wait and see” strategy of the last decade is no longer paying off.
Bid-Ask Spread
Given this dynamic, sellers are beginning to accept lower pricing, especially as they are not immune to broader macroeconomic factors (e.g. inflation). This is illustrated by the average transaction on EquityZen’s platform, which is happening at a 40%+1 discount to the company’s last funding round. Yet many sellers are still holding out, hoping to avoid selling at the yet-to-be-established bottom, and thus haven’t yet matched with the buyers who are ready to invest at lower levels. In industry parlance “the bid-ask spread is still wide”, but it does seem to be shrinking with lower offers meeting lower bids. While some sellers and investors may be waiting on the sidelines, unlike the public markets, there isn’t perpetual liquidity or availability in the private markets so waiting for a certain price has its own risks.
Market Access Still Matters
While volatility hits harder in the short term, private companies staying private longer necessitates private market liquidity for participants of all sizes. Each individual seller has unique circumstances that drive their need for liquidity and a one-size-fits-all model for liquidity does not solve for this. While there are many liquidity avenues for the early stage venture investor, what about the employee who wants to send their kid to college and was counting on the company going public last year to help pay for it? EquityZen remains committed to serving the needs of the individual shareholders who count on us for liquidity, especially in markets like this.
In serving individual shareholders we further our ability to serve our investor community as well. EquityZen has seen institutional investors become more active in the secondary market given the attractive buying opportunities. Individual investors should also have the same access to these investment opportunities. Our network of 290,000 investors and shareholders allows us to offer a wider menu of investment opportunities to our investors, versus brokers who focus primarily on institutions, and we remain committed to doing this with the market's lowest investment minimums.
Throughout market cycles, we never forget who we are doing this for. Up market or down market, we are dealing with people’s hard earned money and we take this seriously. As the popularity of private market secondaries have grown, we remain reminded that these markets are regulated for a reason, and it’s important not to play fast and loose with peoples’ nest eggs. While the market landscape will inevitably change, our top priority remains the same: acting as a trusted platform, one that’s pioneered the space and has built trusted relationships for 10 years.
Sources
1. EquityZen data, as of January 2023
