A week ago, US-based stock exchange Nasdaq said it would separate its existing marketplace for private company shares into a new unit.
With Wall Street giants Goldman Sachs, Morgan Stanley and Citigroup alongside California ingenue Silicon Valley Bank (SVB) buying into the new division it “will prove exceptionally difficult to compete against”, according to the Financial Times.
There is already $30bn traded on private exchanges, such as Carta and EquityZen, the FT added. But the potential market is vast, and growing.
After raising an almost $6.7bn fund in March, hedge fund Tiger Global had invested the vast majority of the capital by June, according to a letter to investors seen by the FT. Its new $10bn fund will begin accepting capital as soon as October and, in marketing documents, Tiger Global said it had “consistently underestimated” the market for private tech companies. Six months earlier, data suggested a $3 trillion market opportunity. It was now closer to $5 trillion, the firm said, as it looked to purchase billions of dollars of shares in ByteDance, the owner of social media application TikTok, through secondary sales at prices valuing the company between $400bn and $450bn, according to the FT.
But with even more liquidity to venture potentially surging in from retail and other investors will come tighter bid-ask spreads and effectively little to choose for an entrepreneur whether the business has to sell or float at all.
Alex Lazovsky, managing partner and co-founder of venture capital firm Scale-Up VC, in an article for Forbes thinks this is the biggest change for VCs.
“Perhaps the biggest change is just now emerging on the horizon, and it could dissolve the entire concept of ‘exit’ from below. The secondary market looks set to go retail, which might largely erase the difference between the public and private equity markets.
“If anyone with some extra income and a smartphone can invest in startup equity, does that make everyone a VC? Will existing VCs be priced out of their own market? If startups have access to unlimited public finance while still in the garage, what would ‘exit’ mean? Where is the gap? Will Sequoia meet the same fate as the once-mighty record company EMI?”
Probably not. As the Economist noted in its obituary for Yang Huaiding – China’s “first shareholder”, known as “Yang Millions” – it is “no good treating the market like a casino. You had to study it constantly, the companies, the conditions, the mood, before you jumped.”
The winners, therefore, are rarely the Robinhood traders but those with an edge – inside information on the likely future performance of a business.
And here, SVB is likely to be far more disruptive to the traditional investment banks as a result of the Nasdaq spinout.
SVB has the financials for the main VC firms and hence which ones to support as well as many of the entrepreneurs.
Throw in SVB’s work with corporations to help them partner these entrepreneurs as a customer and the future revenues it can bring then this is an unprecedented edge.
The only surprise is the big banks have yet to buy SVB before it reached this stage.
