The world of private equity investing has long been exclusive, limited to institutional investors and high-net-worth individuals. Atish Davda, CEO and founder of EquityZen, is on a mission to change that. EquityZen is a marketplace that allows accredited investors to buy and sell shares of pre-IPO companies, opening up a world of investment opportunities previously inaccessible to most.
In a recent episode of the Startup Project podcast, Atish discussed the evolution of secondary markets, EquityZen’s business model, the nuances of investing in secondary shares, and the outlook for IPOs and the secondary market in general.
Listen below, and continue reading for highlights from his comments, edited for context and clarity. Subscribe to Startup Project and hear more episodes at thestartupproject.io.
From Quant Hedge Fund to Private Equity Pioneer
Atish’s journey to founding EquityZen began with a personal need. Working at a quant hedge fund, he recognized the limitations of accessing liquidity for private company shares, especially for smaller investors. This realization sparked the idea for a platform that would bridge the gap between private companies and individual investors.
The Evolution of Secondary Markets: Three Distinct Phases
Kapoor outlines three phases in the private market’s evolution:
1. Early IPOs: Companies used to go public much earlier in their lifecycle, providing liquidity to early investors and employees. The dot-com boom exemplifies this era.
2. The Rise of Secondary Transactions: As companies stayed private longer, larger investment banks facilitated secondary transactions primarily for large institutional investors.
3. Democratization of Access: EquityZen pioneered the standardization and automation of secondary transactions, making them accessible to smaller accredited investors online.
EquityZen’s Model: Standardization, Technology, and Transparency
EquityZen differentiates itself by standardizing the transaction process, leveraging technology to reduce costs, and ensuring transparency by giving issuing companies a seat at the table. They involve companies in the decision-making process, offering visibility into who’s buying and selling, and obtaining permission for transactions, fostering a trusted partnership.
Key Considerations for Investing in Secondary Shares
Atish advises investors to consider the following:
- Portfolio Allocation: Determine the appropriate percentage of your portfolio to allocate to pre-IPO investments.
- Sophistication Level: Choose between investing in diversified multi-company offerings or selecting individual companies.
- Deal Evaluation: Analyze factors such as the series of stock, discount or premium to the last round of capital, revenue stream, management team, and existing investors.
Navigating the Complexities of ROFRs and IOUs
Atish clarifies the distinction between right of first refusal (ROFR) and blocking rights. ROFR allows companies to match an offer and prevent unwanted investors on their cap table. He cautions against “forward contracts” or IOUs offered by some competitors, which can expose investors to legal and financial risks.
EquityZen’s Data-Driven Approach and Marketing Strategy
EquityZen leverages its transaction data to inform issuers, investors, and shareholders, but doesn’t sell or license this data. Their marketing focuses on education and empowering investors to make informed decisions rather than promoting individual deals.
IPOs and Direct Listings: Implications for Exits
Atish explains the difference between IPOs and direct listings regarding lockup periods. He also points out that EquityZen offers investors the potential for liquidity before a company goes public, decoupling their exit from the company’s IPO timeline.
Looking Ahead: A Positive Outlook for Secondary Markets
Kapoor is optimistic about the future of the secondary market, anticipating increased IPO and M&A activity, which will drive secondary transaction volume. He believes EquityZen is well-positioned for growth, having built a strong foundation of trust and transparency.
To listen to the full conversation and learn more about Aatish Davda’s insights on the evolving landscape of private equity investing, check out the Startup Project podcast episode here. Subscribe to Startup Project in Spotify, Apple Podcasts, and YouTube.