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Earlier today, we spoke with Phil Haslett, co-founder and now chief strategy officer of EquityZenA 10-year-old secondary market based in New York that connects accredited buyers with shares of private companies that their owners – including founders, employees and venture capitalists – want to sell.

It’s hard to operate right now, competing with shares of publicly traded companies that are selling at bargain prices compared to a year ago and are much more liquid. Indeed, like many outfits, EquityZen last month held a significant layoffparting ways with 27% of its then 110-strong team.

Still, Haslett firmly believes the aftermarket will only grow over time. . after getting over that very big hump. More on what he sees on pricing, hot and cold sectors and more follows below in excerpts from our chat, lightly edited for length.

TC: The market was completely locked in June, with tons of demand to sell secondary stocks, but not many buyers as people sat on the sidelines to find out how bad things were going to get. What’s going on right now?

PH: The markets were pretty stagnant from April to maybe July or August due to a combination of factors, the biggest of which was sellers’ price expectations when buyers were really looking to get in on names. I’ve certainly seen an uptick. Basically, I think what we’ve seen is the reality setting in for selling shareholders at prices, and also more buyers coming into the secondary space to find investments in names they like because the primary raises aren’t happening at all. happen. If you have a lot of deployment capital and want to invest in late-stage technologies, [and founders aren’t prepared to raise primary rounds] with a 40% discount on the last round of funding, [investors] pass into secondary space.

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

I think any secondary platform or market participant would tell you that 2021 was a unique era for secondary; probably no one comes close to the volume they did last year. [You’re right that if] if you’re an investor, you might say, “There’s a really liquid solution where I can buy companies that are five times or even three times the revenue in the public markets, so why go into the private space?” But once you have exhausted these options, [the question becomes]: what are the names of private companies that you really still believe in for a long time? And how can I as an investor invest in these companies?

What are the “hottest” brands on your platform right now?

Unfortunately, I can’t share actual names if you are curious about the sectors that are most prominent, until Q2 we were quite active in web3 and crypto companies; this has apparently been very quiet lately. Fintech retreated from last year. A consistent sector is in cyber security; public name companies like CrowdStrike and Sentinel One and Zscaler and Palo Alto Networks have done really well, and that kind of moves 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 earnings multiple than in the past.

Are you seeing stocks capped by companies that don’t want the word out that their secondary shares are selling at a huge discount to their last known valuation?

We’ve seen a little bit of the opposite, which sounds counterintuitive, but you have two opposing forces: VCs and founders may be hesitant to have an active market that indicates prices have declined displacement from employees and early investors who have been considering a liquidity event this year or next through an IPO and who have been completely excluded but have cash needs that do not depend on the company’s performance. Also, when a story like the DataRobot one comes out, where a team of senior executives got heaps of liquidity when things were great and they didn’t extend that to the employees [who are dealing with the current market]it’s full egg on your face.

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

We work with institutions; we work with venture capital firms that are buyers and sellers. I would say the trend we’ve seen so far this year is early stage funds that have some positions in their portfolio that have done exceptionally well for them and are marked up and could probably return all the value of the fund [ and they’re liquidating] part of that position so they can return capital to their long-running companies. If you’re a seed fund trying to raise a new fund with no realized profits, it’s a tough conversation. Now, do they want to have [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 prices recover at all or are things still going down?

The current average discounts to the previous funding round that we’ve seen right now are around 40%, which is the lowest we’ve seen. In Q1 it’s probably closer to 20%. This is specific to the name; some stocks are 80% off, some of them are on sale at 10% off. A lot depends on how the last round looks. If you raised 100x 2021 revenue from SoftBank in a really competitively led round, we’re seeing discounts that are wider than 40% compared to companies that raised capital in the first quarter or two of this year at more “related” rating, where you may see a more modest discount.

I wouldn’t say we’re seeing a ratings recovery. I will say that the acceleration to the downside is slowing down, so we don’t see stocks going from 40% to 60% right away. So my guess is that if more deals start happening in that 40% range, especially with large institutions and well-known institutions, that could mean that we’re either going to be sitting on that floor or we’re going to start to recover. [But] many remain dependent on the performance of 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] on secondary markets continue to decline.

How much has EquityZen raised from VCs over the years?

Just under $7 million. We are a very boring company when it comes to supporting risky projects. We last raised money in February 2017. We really relied on the business model and profitability of the business to reinvest and grow.

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

One of your rivals, Forge Global, went public in March through a SPAC and the timing hasn’t helped, but its stock is trading at $1.33. Its market capitalization is just $230 million, down from the $238 million investors poured into the company when it was still private. How does this affect how you think about next steps?

We are still very much in the early innings. We want to be able to continue to provide private markets to the public. And if that means doing it as a public company, that’s fine. If that means doing it as a private company, that’s fine too. If that means doing it as part of a larger financial services business, that’s fine too, as long as we can keep working on it. We have around 250,000 accredited investors on the platform. To date, we have closed deals with just over 400 private technology companies. I really think we’re just scratching the surface.

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