Henry Ward, the CEO at Carta, says that the firm should no longer facilitate secondary trading of private securities.
Secondary transactions for private securities is an emerging sector of Fintech that provides shareholders with an alternative to an M&A or IPO event to exit an investment. While still in its infancy, multiple platforms have established a path to provide this type of liquidity, which benefits the shareholder.
Ward noted in a blog post that since Carta has the data, and if they are trading secondaries, people will always be concerned (naturally) that they might be leveraging the data, even if they’re not actually doing so.
Ward added that this is why they decided to prioritize trust and exit the secondary trading business altogether. Ward has also provided additional context on this issue.
He explained that liquidity can be a significant problem, so he wanted to solve this issue for nearly a decade (dating all the way back from their Series A deck in 2014).
The Carta CEO noted that he started eShares 10 years ago as the “Nasdaq for Private Markets” (they were not “the capable company”) because he claims that he wanted to “solve the liquidity problem for founders, employees, and angel investors.”
He pointed out that the percentage of startups that get to IPO is so small “that 99% of founders never receive liquidity and spend a decade or more paper rich but cash poor.”
According to Ward, this seemed like a problem that was worth solving.
Fast forward to now, Carta’s business is broken down as follows, according to Ward: the capable business is “about $250M/year, fund administration is about $100M, private equity is about $20M, and the secondary trading business is about $3M.”
Ward claims that they’ve done a decent job at “building the capable business, an ok job at fund admin (but feeling the growing pains), and an abysmal job at the secondary business,” calling his decision to exit the sector a great failure. He added that “auctions, investor matching, secondary trading, open tender offers, have not worked.”
Ward said he may not be the entrepreneur to solve the liquidity challenge. He continued:
“Because we have the data, we can’t use it. But I am learning something else — Carta might not be the company that can solve this problem. Many people think we are best poised to solve liquidity because we have captable data. But that same argument is used for data products.”
He also noted:
“People say ‘You have all the data so you should put Pitchbook out of business!’ But it is precisely because we have the data, that we can’t use it. It is our customers’ data, not ours. That’s why in ten years Carta has never released a data product. I use Pitchbook and Techcrunch when I research a company before I meet the CEO.”
He added that having ground truth data is “not an advantage if we can’t use it. And it is a disadvantage if people think we use it. For example, if we send emails to prospects using publicly available information, how do customers know if we sourced it publicly or internally? Will they believe us if we tell them? And does it matter? Just the appearance of impropriety is damning.”
He also shared:
“From the beginning, we have always built for founders. Even in our liquidity business, the northstar has been to create systematic founder liquidity, that they control, which they can extend to everyone else on the captable. Historically, liquidity has not been founder friendly and our goal was to change that. But we have not succeeded.”
He claims:
“We won’t do anything that threatens the trust of our founders. And so we will exit the secondary trading business to eliminate any concern that we are not acting in our founders’ best interests. We will focus on what we do best, which is cap table and fund administration software. There are many many talented people working on the private market liquidity problem. We will enthusiastically cheer for them from the sidelines. It is an important problem. I hope someone solves it.”
