Should Carta Facilitate Secondary Trading?
No. Not anymore. Because we have the data, if we are trading secondaries, people will always worry that we are using the data, even if we are not. So we have decided to prioritize trust, and exit the secondary trading business.
For those interested, let me provide more context below.
Nasdaq for Private Markets?
We started eShares 10 years ago as the “Nasdaq for Private Markets” (we were not “the captable company”) because I wanted to solve the liquidity problem for founders, employees, and angel investors. 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. That seemed a problem worth solving.
Fast forward to today, our business is broken down as follows: the captable business is about $250M/year, fund administration is about $100M, private equity is about $20M, and the secondary trading business is about $3M. We have done a decent job at building the captable business, an ok job at fund admin (but feeling the growing pains), and an abysmal job at the secondary business.
It is my greatest failure and disappointment. Some of my other ideas have worked — like captables, 409As, fund administration, private equity. But ALL of my ideas around liquidity — auctions, investor matching, secondary trading, open tender offers, have not worked. I might not be the entrepreneur that can solve this problem.
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. 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.
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 through 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.
Founders Come First
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.
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.
