This secondary markets expert says we haven’t hit bottom yet

Earlier today, we talked with Phil Haslett, the cofounder and now chief strategy officer of EquityZen, a 10-year-old, New York-based secondary marketplace that connects accredited buyers with privately held company shares that their owners — including founders, employees, and VCs — are looking to sell.

It’s a tough business to be running right now, competing as it is with shares of publicly traded companies that are selling at fire-sale prices compared with a year ago and are far more liquid. Indeed, like a lot of outfits, EquityZen last month conducted a sizable layoff, parting ways with 27% of its then 110-person team.

Still, Haslett believes adamantly that the secondary market will only grow bigger over time . . once it gets over this very big hump. More on what he’s seeing on pricing, hot and cold sectors, and more follows below in excerpts from our chat, lightly edited for length.

TC: The market was completely stuck back in June, with tons of demand to sell secondary shares but not a lot of buyers as people sat on the sidelines to figure out how bad things would get. What’s happening right now?

PH: The markets were pretty stagnant from April to maybe July or August owing to a combination of factors, the biggest being the pricing expectations sellers had where buyers really wanted to get into names. I’ve certainly seen an uptick. Mainly, I think what we’ve seen is reality setting in for selling shareholders on prices and also more buyers coming to the secondary space to find investments in names they like, because primary raises aren’t happening at all. If you’ve got a lot of capital to deploy, and you want to invest in late-stage tech, [and founders aren’t prepared to raise primary rounds] at a 40% discount to their last funding round,  [investors] cross into the secondary space.

You’re competing with publicly traded companies that are also very steeply discounted right now. In terms of transaction volume, how does it compare with a year ago?

I think any secondary platform or market participant would tell you that 2021 was a unique era for secondaries; probably no one is coming close to doing the amount of volume they did last year. [You’re right that if] you’re an investor, you might say, ‘There’s a really liquid solution out there where I can buy companies that are five times or even three times revenue in the public markets, so why would I enter into the private space?’ But once you’ve exhausted those opportunities, [the question becomes]: which are the private company names that you really still have a long-term belief in? And how can I as an investor deploy capital into those companies?

What are the ‘hottest’ brands on your platform right now?

Unfortunately, I can’t share actual names if you’re curious about sectors that are the most prominent, up until Q2, we were pretty active in web3 and crypto companies; that’s obviously gone really quiet of late. Fintech has retreated relative to last year. A consistent sector has been in cybersecurity; public names companies like CrowdStrike and Sentinel One and Zscaler and Palo Alto Networks have performed really well and that kind of feeds down into the private space where there are a lot of well-capitalized private companies that are solving a cybersecurity solution. Enterprise SaaS companies are still doing well, but [selling based] on a much more conservative multiple on revenue than in the past.

Are you seeing shares restricted by companies that don’t want it getting out that their secondary shares are selling at a huge discount to their last known valuation?

We’ve seen a bit of the opposite, which sounds counterintuitive, but you’ve got two opposing forces: venture capital firms and founders may be hesitant to have an active market that shows prices have gone down offset by employees and early investors who were thinking about a liquidity event this year or next year by way of an IPO and who’ve been completely shut out but have cash needs that are independent of the company’s performance. Also, when a story comes out like that of DataRobot, where a team of senior leaders got a bunch of liquidity when things were great and they didn’t extend that out to employees [who are dealing with the current market], that’s a complete egg on your face.

You work with a lot of founders and employees. Do you also handle institutional type trades? If a VC wants to sell a percentage of their entire portfolio to another buyer, can you handle that?

We do work with institutions; we work with venture capital firms that are buyers and sellers. I would say the trend that we’ve seen so far this year is seed stage funds that have some positions in their portfolio that have done tremendously well for them and are marked up and probably could return the entire value of the fund [ and they’re liquidating] some of that position so that they can return capital to their to their LPs. If you’re a seed stage fund to try to raise a new fund with no realized gains, that’s a tough conversation. Now, do they wish they had [sold a portion of those holdings] last year? I’m sure they do.

Of course, no one wants to catch a falling knife. Have you seen a bounce back at all in prices or are things still trending down? 

Current average discounts to the previous funding round we’ve seen right now are at about 40%, which is the lowest we’ve seen. In Q1, it was probably closer to 20%. It’s name-specific; some shares are at an 80% discount, some of them are selling at 10% discounts. A lot depends on what that last round looked like. If you raised at 100x revenue in 2021 from SoftBank at a really competitively-led round, we’re seeing discounts that are wider than 40% compared with companies that raised capital in the first quarter or two of this year at a more ‘relatable’ valuation, where you might see a more modest discount.

I wouldn’t say that we’ve seen a bounce back on valuations. I will say that the acceleration downwards is slowing down, so we’re not seeing shares go from 40% to 60% immediately. And so my guess is if more trades start to happen at this 40% range, particularly involving large institutions and known institutions, it may indicate that we’re either going to sit at this floor or we’re going to start to bounce back. [But] a lot of it remains dependent on performance in the public markets. If we continue to see the Nasdaq trade down another 5% to 10% and the high-beta names in the public markets trade down 20% or 30%, you’ll see [share value] in the secondary markets continue to go down.

How much has EquityZen raised from VCs over the years?

A little under $7 million. We’re a very boring company as far as venture backing goes. We last raised money in February 2017.  We’ve really relied on the business model and profitability of the business to reinvest and grow.

I would say it’s probably the hardest thing we’ve had to do here at EquityZen by far, letting go of some really, really good people [last month]. But the benefit of being a company that hasn’t raised too much outside funding is that it was a decision we made when we wanted to make it. It wasn’t something that a board told us we had to do before by XYZ date.

A rival of yours, Forge Global, went public back in March through a SPAC and its timing didn’t help but its shares are trading at $1.33. Its market cap is just $230 million, which is less than the $238 million that investors had poured into the company when it was still private. How does that impact how you’re thinking about next steps?

We’re still very much in the early innings. We want to be able to continue to bring private markets to the public. And if that means that it’s doing it as a public company, that’s fine. If it means doing it as a privately held company, that’s also fine. If that means doing it as part of a larger financial services business, that’s also okay, so long as we can continue to work on it. We’ve got about 250,000 accredited investors on the platform. We’ve transacted in a little over 400 private technology companies to date. I really do think we’re just starting to scratch the surface.