A Really Big Fish in Our Pond
To our Valued Investors:
Last week, Nasdaq, Inc. made an announcement that seized the attention of everybody who makes a living in pre-IPO investments. The news centered around a joint venture between Nasdaq, Silicon Valley Bank, Citigroup, Goldman Sachs, and Morgan Stanley, which would join forces to build a technology-rich platform for the trading of shares in private companies. On the surface, a collaboration of these finance industry giants might appear to spell doom for smaller, less deep-pocketed purveyors of private company investments like Iron Edge VC. Indeed, we fielded many phone calls and emails inquiring as to whether we would be able to survive the sudden presence of such an oversized competitor. We were asked this enough times to compel us to devote this week’s newsletter to clearing the air on the topic.
In 2004, Barry Silbert founded SecondMarket to provide liquidity for owners of restricted shares in private companies. The concept was truly an innovative one, and SecondMarket’s inception was arguably the moment our pre-IPO investment industry was born. The company not only freed up cash for early private investors, but also delivered a novel alternative investment for institutions that thought outside of the box. This kind of transaction has benefitted Iron Edge VC (and you, if you’re a veteran IEVC investor) many times over. Exposure to pre-IPO investing expanded broadly around the time of Facebook’s 2012 IPO, and that is also when some retail-facing boutique private investment funds began to pop up. By 2015, after four funding rounds, SecondMarket had a valuation of more than $200 million, and it boasted more than 53,000 registered participants. It was then that Nasdaq acquired SecondMarket and rebranded it as Nasdaq Private Market.
Prior to the acquisition, SecondMarket had branched out into several different services including specialty loans, limited partnership transfers, and a bankruptcy claims market. As part of Nasdaq, though, the fundamental purpose was private equity sales. More specifically, Nasdaq Private Market focused on tender offers. A tender offer is a publicly announced bid to purchase large numbers of shares in a company during a set time period, usually at a premium to the company’s current valuation (to motivate potential sellers) and often established for the purpose of gaining legal control of the company. Nasdaq, a well-established equity exchange operator with prolific compliance expertise, was well-suited to facilitate this kind of commerce.
Nasdaq Private Market’s joint venture with Goldman, Morgan, and the others will, of course, greatly bolster the volume of its private company tender offer business. After all, these respected investment bankers had been executing such massive trades in the public marketplace for many decades, and their Rolodexes are stuffed with institutional investors who tend to play in that arena. Also, some speculate that by framing Private Market as a standalone entity, Nasdaq can simplify its regulatory obligations with the tender offer machine sitting at an arm’s length. For their part, the big banks now have skin in the game, and they can profit from their efforts in more ways as they share the fees applied to the offers. While private stockholders do indeed find liquidity in the process and the large investors get shares for their money, the key point is that Private Market serves institutions. They are not the place to go for individual accredited investors seeking to pick up a couple of thousand shares of Impossible Foods or Robinhood. Private Market operates as a Software as a Service (SaaS) company, simply providing a one-stop-shopping platform for large entities to execute tender offers while overseeing all of the important legal nuances that come with the territory.
By contrast, Iron Edge VC’s focus is on the individual. We do not arrange those big tender offers for institutional investors. Our mission is to serve you, the accredited investor. We are your go-to source for gaining access to fund-based ownership of private companies before that IPO “pop”. The “fund-based” qualifier means that it is Iron Edge VC that acquires blocks of inventory and becomes a registered shareholder of a particular company, and then the series that we create within our private equity funds represent our clients’ claims to the shares as soon as the company goes public and releases the shares from any insider lockup restrictions applied to all pre-IPO owners. What begins as an Iron Edge fund investment in a specific private company ends in ownership of freely tradable shares in the company after it goes public.
On that topic, we acknowledge that we are not the only game in town. Other companies, like EquityZen and Forge, maintain significant retail-facing operations. What sets us apart from them is that we don’t see ourselves as a pre-IPO “superstore” that has virtual shelves stocked with every name in the private company universe. Our portfolio is meticulously curated. We tirelessly root out value. Rather than parade out the most popular names or, as we like to call them, the “greatest unicorn hits”, we spend much time ferreting out somewhat lesser-known companies that haven’t been pumped up by out-of-control demand (see Beware the Unfettered Valuation, May 12, 2021). By no means is this a criticism of the high-profile late-stage private companies that are most commonly offered to individual investors elsewhere; these are successful companies that have truly earned their admirable name recognition. Still, we favor the potentially higher multiples of hidden gems over the modest returns or breakeven trades that might be found in the big game that has already been picked clean. We are in the business of furnishing investments that will motivate clients to keep coming back to us, and not of enticing people with low-hanging fruit that has already been squeezed juiceless simply so we can book a high volume of one-off trades.
Setting the digression aside, let’s return to the core question. Does the Nasdaq-led joint venture threaten Iron Edge VC with Goliath-like competition? Definitely not. Private Market will succeed in optimizing giant institutional deals, but it is currently of no use to individuals who simply want to fortify their nest eggs with personal alternative investments. Iron Edge VC is where the individual retail client can find value. If you would like to learn more, or if you know anybody else who would, please don’t hesitate to contact us by clicking “Get in Touch” below. When you reach out that way, you will experience firsthand our commitment to the individual.
If you have enjoyed this article, visit the Iron Edge Blog for past updates on our carefully selected roster of pre-IPO investment opportunities.
As always, shares are available on a first come, first served basis.
All the Best,
Founder & Managing Partner