The Coming Crisis
Companies are staying private longer and longer. Not going public like they used to.
Here’s a few more, from founding to IPO:
- Google: IPO in 6 years
- Apple: IPO in 4 years
- Amazon: IPO in 2 years
- Tesla: IPO in 6 years
- IBM: IPO in 4 years
Modern startups in the past decade stayed private much longer:
- Dropbox: IPO in 11 years
- Coinbase: IPO in 9 years
- Airbnb: IPO in 12 years
- Uber: IPO in 10 years
- Stripe: 13 years, still no IPO
- SpaceX: 21 years, still no IPO
This trend is only accelerating.
Heck, AOL IPO-ed at a $70m valuation in 1992, raising just $10m. That was the size of a typical seed round in 2021 🤯
This wealth creation is now increasingly happening in private markets, not public. This is to the obvious detriment of pension funds, retirement plans, and most individual investors.
But why?
The Dying Alpha in Public Markets
In a nutshell, Dodd-Frank and other new regulations made it a lot more expensive for companies to go public. As a small or mid-cap company, it can cost $10-$30 million / year in compliance costs to be a public company in the United States.
Private markets in parallel grew significantly in volume with new LPs — cross-over funds, sovereign wealth funds and even public market institutions like Fidelity and T.Rowe Price coming in. Startups could now privately raise billions, which was extremely rare a decade ago.
The risk-reward equation flipped. As a CEO if you could access nearly the same amount of capital as a private company with few of the liabilities, headaches and costs, why go public? 🤷‍♂️
Ask any serious founder or investment banker these days and they will tell you that going public just doesn’t make a lot of sense if your valuation is less than $10 billion.
The $0-to-$10 billion growth phase where much of the exciting wealth creation happens is now largely happening in private markets. And out of reach of most investors.
This is why democratizing access to startup investing matters.
Why Secondaries?
There is a power law in VC, where the best 2-3 deals in a fund often return more than the next 100 investments. It follows that any venture investment strategy must attempt to get into the best deals to generate decent returns. If you get left out of a deal you want for any reason, and this happens often, your returns will suck.
Consider: would you have been invited to invest in companies like Stripe, Instacart, Discord, Twitter and OpenAI? What about the top quartile of each Y-Combinator class?
For most investors the answer is simply no. The best deals flow first to a handful of funds and individuals (Sequoia, a16z, Floodgate, SV Angel, Elad Gill, Ron Conway, Naval Ravikant etc).
For most investors playing that game with the best will result in adverse selection: you’ll get the scraps. Don’t play a losing game.
Secondaries — where you buy shares from employees, founders or other investors rather than the company itself — are how you get in. Secondaries are a strategy, not just an instrument, to get into the best deals.
The Robinhood for Secondaries
There are several key structural issues that would need to be solved to unlock private market potential:
We can solve for these using Secondaries:
We call this a “Robinhood for Secondaries” — a low fee, transparent way to invest in the best pre-IPO and growth-stage startups.
Once the basics are working, we hope to explore other startup assets including:
- GP Carry: many Fund GPs have valuable, illiquid carry positions worth hundreds of millions that they can’t monetize until IPO.
- Founder secondaries in hot Seed/A/B/C deals
- LP interests
- End-of-life Fund positions
Come join the fight to democratize startup investing and wealth creation✌️
Ali Moiz
Palo Alto, CA
Sandhill Markets
