Private market liquidity is gaining momentum
We've seen explosive growth around private market liquidity transactions in 2021, and we expect it to continue. Here’s what that means.
U.S. companies are staying private longer, and that’s making it harder for shareholders to unlock the value of their equity.
The median age of tech companies that went public in 2020 was 12.5 years, compared with eight years for tech IPOs in 1997, the year Amazon went public. That was a different time for venture-backed tech companies, when most of their growth occurred after going public.
Amazon raised only $8 million before it went public at a $438 million market value after just three years in business. Most of Amazon’s growth took place after it went public: Today, its market capitalization exceeds $1.7 trillion.
Despite Amazon’s success, private companies today are not following its rush to the public market. “It's often true that companies hit the steepest part of their growth curves in their early years, increasingly while they are still private,” said Lise Buyer, founder of IPO advisory firm Class V Group. “This is a marked change from the days before the JOBS Act of 2012, when more companies went public before reaching multi-billion dollar valuations.”
The trend of companies maturing in the private markets is leaving employees and investors yearning for liquidity. Certainly, founders are seeking liquidity like never before; at Carta, we've seen an explosive growth in liquidity transactions in 2021.
The CartaX platform for private market transactions
The CartaX platform offers several liquidity options for private companies. One of these is the Carta Cross, an auction-based secondary market transaction that allows private company shareholders to sell their shares to a group of institutional and accredited investors selected by the company.
Companies holding a Carta Cross invite specific investors to become buyers of their stock. Sellers in a Carta Cross transaction can include any owners of company equity, including employees, ex-employees, and early investors. Participants then place buy and sell orders for company stock on CartaX. At the close of the auction, CartaX establishes a clearing price that maximizes the number of shares traded.
The Carta Cross auction is more than just an equities transaction. It’s also a mechanism for companies to establish a competition-driven price for their private stock. In a private market environment filled with surplus capital, a competition-driven price can give private companies several advantages: It can prevent excess dilution in subsequent funding rounds, lower the cost of capital and equity compensation when hiring new employees, and reduce expenses in mergers and acquisitions when those are pursued.
Carta Inc.—the parent company of CartaX—was the first issuer to execute a Carta Cross, in January 2021. Invited buyers included more than 100 institutional investors. Only 10% of these institutional investors were existing investors on Carta’s cap table. Sellers included Carta employees and former employees, as well as investors who wanted to liquidate some of their shares. Sellers traded $99.7 million in common and preferred shares, at an implied $6.9 billion valuation for the company. The transaction more than doubled the implied valuation established by Carta’s previous funding round, without the dilution associated with primary capital raising.
Carta then used the implied valuation from its first auction as a data point for its Series G fundraise. By running a secondary auction on CartaX, the company was able to use the outcome of that auction to set a price for its capital raise. Carta held its second Carta Cross in September, and will continue to hold Carta Cross auctions on a quarterly basis, to provide employees and investors consistent opportunities for liquidity.
Providing value to employees
Other companies have taken notice of Carta’s success with the Carta Cross auction, and have begun the process of listing and transacting on CartaX.
EquipmentShare was the second company to list and transact on CartaX. Based in Columbia, Mo., EquipmentShare employs nearly 3,000 employees and raised a $230 million Series D funding round in July 2021.
Since its founding in 2014, EquipmentShare has been working to solve some of the biggest problems in the construction industry. The concept initially started out as a peer-to-peer marketplace where construction vehicle owners could rent their equipment to different job sites. Since then, EquipmentShare has expanded to help contractors manage construction projects through tech-enabled hardware and cloud-based software. Construction companies can use EquipmentShare’s T3 platform to gain real-time visibility and control over their projects with T3-connected devices, digital work orders, and time cards. T3 generates data-driven insights for managing people and materials.
“When we saw the results of Carta’s first Carta Cross auction on CartaX, we felt we had to try the platform for ourselves,” said Willy Schlacks, co-founder and president of EquipmentShare.
“As the newest issuer on CartaX, we were pleased with the outcome of our auction, which resulted in a premium to the valuation we reached in our last fundraising round,” said EquipmentShare co-founder and CEO Jabbok Schlacks.
The company partnered with CartaX to deliver on one of its most important goals: providing liquidity to employees. CartaX helped EquipmentShare achieve this goal with a low-touch liquidity platform, employee education tools, and access to a diverse group of investors, including venture capital firms, hedge funds, family offices, and direct secondary funds.
“Going through the Carta Cross, we were able to provide value to our employees and share our story with new investors,” said Willy Schlacks.
Tender offers and SPVs
While several companies are now planning their own Carta Cross, others are opting for tender offers. In a tender offer, a private company or an investor interested in a private company buys a block of stock from existing shareholders at a price the company negotiates. Tender offers are another type of transaction that allows startup employees to sell their equity while the company is still private.
Demand for Carta’s tender offer business has grown rapidly over the past year. During the first nine months of 2021, Carta transacted $4.7 billion in 77 tender offers, up from $1.8 billion in 18 tender offers over the same period last year—that’s a 261% increase in the value returned to shareholders and a 428% increase in the number of total tender offers. Carta expects this surge in growth to continue in the coming months.
CartaX also provides liquidity options for investors in special purpose vehicles (SPVs). In the venture capital sector, investors form SPVs to make direct investments in private companies. If investors in an SPV want to liquidate their holdings, they can trade their allocations in private companies to other investors using CartaX.
VC fundraising continues to break records, and the excitement for private market investments has never been greater. The CartaX team is researching and designing new ways to provide liquidity to meet the growing demand.
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The benefits of controlled liquidityOffering private companies customized paths to liquidity is a way to centralize transactions, meet investor demand, and offer employees the opportunity to access their share of wealth they helped create.
EquipmentShare Carta CrossEquipmentShare partnered with CartaX to offer a unique employee liquidity program. The company is the first issuer to transact a Carta Cross on the CartaX platform, outside of Carta, Inc.
The Carta liquidity report: Q3 2021The Q3 Liquidity Report highlights the tremendous growth of tender offers across the venture sector. Carta has already seen more tender offer transactions in 2021 than in the previous two years combined.