Tag: Foundations

For years, investing in high-growth startups was largely the domain of venture capitalists and institutional investors. But what about the employees who built these companies, or individuals eager to get in on the ground floor before a public offering? That’s the gap EquityZen, a pioneering platform for secondary private equity, has been bridging for over a decade.

In a recent episode of the Startup Project podcast, Nataraj, the host, sat down with Aatish, CEO and founder of EquityZen, to delve into the fascinating world of secondary markets, the story behind EquityZen’s inception, and the future of private equity investing.

From Personal Need to Market Innovation: The Genesis of EquityZen

Aatish’s journey into the world of secondary markets began with a personal challenge. Having transitioned from a quant hedge fund to the startup world, he found himself holding equity in private companies. When he needed liquidity for a personal milestone – an engagement ring, as he humorously shares – he discovered a frustrating reality. The existing financial infrastructure catered to large institutional investors, leaving individuals with smaller stakes in private companies with virtually no options to sell their shares.

This personal friction point sparked the idea for EquityZen. Aatish envisioned a platform that would democratize access to private markets, allowing employees, early investors, and even accredited individual investors to participate in the growth of late-stage private companies before they hit the public markets. EquityZen’s mission is clear: “to build private markets for the public.”

The Evolution of Secondary Markets: From IPOs to Private Teenagers

To understand the value proposition of EquityZen, it’s crucial to grasp the evolution of secondary markets. Aatish outlined three distinct phases. In the early days, companies went public much sooner, often within 3-5 years of inception. Think Amazon, which went public as a four-year-old company. This “Phase One” meant public investors absorbed the early risk and provided liquidity.

“Phase Two” saw the rise of mega-private companies like Facebook, LinkedIn, and Groupon. These companies, despite reaching billion-dollar valuations, remained private for much longer. Large investment banks like Goldman Sachs stepped in, facilitating secondary transactions, but these were primarily for massive blocks of shares, catering to hedge funds and family offices, not the average shareholder.

EquityZen ushered in “Phase Three,” revolutionizing the market by standardizing the process and leveraging technology to drastically lower the barriers to entry. By building infrastructure and amortizing costs across numerous transactions, EquityZen made it feasible to trade smaller blocks of shares, opening up the market to a broader audience of accredited investors. This standardization included streamlining paperwork and creating a user-friendly online platform, reminiscent of the rise of AngelList for early-stage investing.

Standardization and Key Terms in Secondary Transactions

Nataraj drew parallels between EquityZen and AngelList, highlighting the standardization both platforms brought to their respective domains. Aatish clarified the fundamental difference: AngelList primarily focuses on primary transactions – companies raising capital directly. EquityZen, on the other hand, deals with secondary transactions – shareholders selling existing shares. This distinction also translates to different risk profiles and return expectations. Early-stage investments are high-risk, high-reward, often following a power law distribution. Late-stage secondary investments are generally considered less risky, targeting more established businesses with potential for doubles or triples, rather than home runs.

When evaluating secondary investments, Aatish highlighted key considerations:

• Portfolio Allocation: Determine the appropriate allocation to private equity within your overall investment portfolio.

• Sophistication Level: Decide between diversified multi-company offerings (like an ETF for private equity) or building a portfolio of individual companies based on sector expertise.

• Deal Terms: Understand the type of stock (preferred or common), the discount or premium to the last funding round, and the company’s fundamentals.

• Investor Due Diligence: Leverage the due diligence done by leading institutional investors like Sequoia or Andreessen Horowitz, who often participate in later-stage funding rounds.

Single Company vs. Portfolio Offerings: Choosing Your Strategy

EquityZen offers both single-company transactions and portfolio offerings. Aatish explained that single-company transactions currently constitute the larger part of their business, reflecting the early adopter phase of the market. He believes investors are increasingly looking to leverage their sector-specific knowledge to pick individual winners.

However, he anticipates that structured products, like portfolio offerings, will become increasingly popular as the market matures and broadens its appeal to investors who may lack deep sector expertise but still desire exposure to private equity.

Trust and Regulation: Cornerstones of the Secondary Market

The conversation then turned to the critical aspect of trust and regulation in secondary markets. Aatish emphasized EquityZen’s unique three-sided marketplace approach, involving not just buyers and sellers, but also the issuing company. EquityZen prioritizes transparency and company consent, ensuring that transactions are conducted with the company’s knowledge and often their approval. This contrasts with some competitors who may facilitate transactions without proper share transfer or company authorization, potentially leading to legal and operational complexities.

Aatish highlighted the importance of Right of First Refusal (ROFR), a standard clause in private company share agreements, allowing the company to preemptively purchase shares to control their cap table. EquityZen respects ROFR and works with companies to ensure compliance, even walking away from potential revenue to maintain trust and regulatory integrity.

Data-Driven Insights, Education-Focused Marketing

Nataraj inquired about how EquityZen utilizes the wealth of transaction data it accumulates. Aatish confirmed they leverage this data to inform issuers, investors, and shareholders, providing cap table insights and transaction ranges. However, EquityZen refrains from aggressively marketing individual company offerings or selling raw data, believing the market is still too nascent for simplistic data-driven investment decisions.

Instead, EquityZen focuses on education-driven marketing, providing extensive resources and knowledge bases to empower investors to make informed decisions. They prioritize long-term trust over short-term gains, even incorporating “friction” into the investment process to encourage careful consideration.

IPOs, Direct Listings, and the Future Outlook

The discussion concluded with the topic of IPOs and the future of the market. Aatish differentiated between traditional IPOs, where lock-up periods restrict immediate selling, and direct listings, offering more immediate liquidity. Crucially, he pointed out that EquityZen’s SPV structure can provide investors with liquidity even before a company goes public, offering a significant advantage in a market where IPO windows can be unpredictable.

Looking ahead to 2025 and beyond, Aatish is optimistic. He anticipates a resurgence of IPO and M&A activity, driven by pent-up pressure from VC funds and private equity sponsors seeking exits. He believes that increased deal flow will fuel secondary market activity, creating more benchmarks and opportunities for investors. With interest rates expected to ease, Aatish foresees a robust period for both primary and secondary private equity markets.

Aatish concluded by emphasizing the long-term trust EquityZen has built within the ecosystem, a testament to their commitment to responsible market development. As the private markets continue to evolve, EquityZen is poised to remain a key player, democratizing access and empowering a broader range of investors to participate in the growth of innovative companies.

---

---

Listen to the latest insights from leaders building the next generation products on Spotify, Apple, Substack and YouTube.

Seattle, a city teeming with tech talent, has the potential to be a thriving startup hub. But what’s holding it back?  Aviel Ginsberg, founder of Simply Measured (acquired by Sprout Social), managing director at Amazon’s Alexa Accelerator, general partner at Founders Co-op, and now co-founder of Foundations, believes the answer lies in fostering a stronger community and providing better support systems for founders.

In a recent episode of the Startup Project podcast, Ginsberg sat down with Nataraj to discuss his multifaceted career, the evolution of the Seattle startup scene, and the mission of Foundations, a new initiative aiming to be the anchor of Seattle’s VC ecosystem.  

Listen to the full episode below, or keep reading for highlights from the conversation, edited for context and clarity. Subscribe to Startup Project for more insightful discussions at thestartupproject.io.

From Startup Weekend to Venture Capital

Ginsberg’s journey into the Seattle tech world began unexpectedly. Arriving fresh out of college during the 2007 recession, he quickly immersed himself in the burgeoning startup scene. A Startup Weekend, where he boldly claimed leadership of the design department, connected him with key players in the community, landing him a job at Aperture, a Founders Co-op portfolio company.

This experience provided invaluable insights into the inner workings of a startup, from coding and product design to customer interaction and product management. He eventually transitioned to founding his own company, Simply Measured, with backing from Founders Co-op.

Founders Co-op: Investing in the Pacific Northwest

Now a general partner at Founders Co-op, Ginsberg, alongside his partner Chris DeVore, focuses on pre-seed and seed stage investments in the Pacific Northwest. They target founders with a “Seattle DNA,” prioritizing those tackling unsexy business workflow problems over flashy consumer products.

The Importance of Founder Motivation

Ginsberg’s investment philosophy emphasizes founder motivation. He seeks individuals driven by an internal need to build and create, those who find fulfillment in the journey itself. This resilience, he believes, is crucial for navigating the inevitable ups and downs of startup life.

The Distortion of Opportunity Size

Ginsberg and Nataraj discuss the inflated expectations surrounding opportunity size during the recent boom. The pursuit of unicorns and decakorns, they argue, led to overvaluation and unsustainable business models.  Ginsberg highlights the importance of recognizing that not every company needs to be a trillion-dollar behemoth. Sometimes, a successful acquisition is the best outcome, even if it means the product eventually gets shut down.

Foundations: A New Anchor for Seattle’s Startup Ecosystem

Foundations, Ginsberg’s latest venture, seeks to strengthen Seattle’s startup scene by fostering a community and providing resources for founders.  Recognizing the need for connection and shared learning, Foundations provides a physical space, events, and an entrepreneur-in-residence program to connect founders with each other and with experienced mentors and investors. 

What Seattle Needs to Thrive

Beyond Foundations, Ginsberg sees the need for more pre-seed funds and programs that help individuals transition from big tech companies to startups. He also emphasizes the importance of cultivating a network of angel investors who can provide quick, small checks based on their belief in the founder’s potential.

Consuming Wisdom: Aviel’s Recommendations

Ginsberg shares his current media consumption, including podcasts like All In, Rogan, and Jordan Peterson, as well as his love for sci-fi shows. He also highly recommends the book “The Courage to Be Disliked.”

Key Takeaway for Investors

Ginsberg’s advice to aspiring investors: Recognize the long feedback loops in investing.  Focus on supporting founders and resist the urge to over-manage.  Find other outlets for your builder’s energy and let the founders build.

To hear the full conversation and learn more about Aviel Ginsberg’s insights, check out the Startup Project podcast episode here. Subscribe on Spotify, Apple Podcasts, and YouTube.