Price discovery in private markets

Carta raised a $500M Series G, valuing the company at $7.4B. The round was led by Silver Lake. Of our eight rounds of capital raised, this was the largest and also the simplest.

I don’t like fundraising. It takes a lot of time to explain the business to each and every investor, and even more time to go back and forth on terms with the investors who are interested in investing. A lot of time is spent figuring out the valuation. Apple’s stock is repriced thousands of times each day by institutional and retail investors submitting bid and ask orders in a marketplace. My stock is repriced once every 18 months by a handful of venture capital associates making models and assessments, and ultimately by me and my investors agreeing on a price and shaking hands.

Price discovery in private markets is inefficient because information is asymmetric. CEOs have to collect bids by hand and negotiate one investor at a time. And investors have (much) more market information than CEOs do. The asymmetry gets worse because CEOs fundraise once in a while. Investors invest all year round.

This time, and for the first time, I had more market data than the investors did.

Between our Series F and Series G we ran an auction on CartaX. We explained what the company did once, and every investor participating could log in to watch and ask questions. They all had access to the data room through the CartaX platform. The auction repriced the company to a $6.9B valuation, up from $3.1B in our Series F eight months prior.

We transacted $100M of secondary in that auction, and a few days after the transaction settled we had inbound interest for a primary at that same valuation. We knew that we had about $1B in aggregate demand, and we had a price in hand. We were able to choose a lead investor based on the value they could add to the business, not the valuation they were willing to offer. We chose Silver Lake, one of the most thoughtful and creative private equity investors in the world, to lead the round. After that, all we had to figure out was allocations.

Having a marketplace set price is simpler and easier than discovering price manually. But more powerful than simplicity is the better pricing an efficient marketplace gets you. With CartaX we let demand for our stock set the price. It was new for me and our CFO to not have control over where our stock would trade in our January auction. You can see the multiple expansion we achieved through market-based priced discovery on CartaX and huge illiquidity discount we have in private markets when CEOs don’t have to do price discovery manually.

A better price is more important than a “good” valuation. Accurately pricing your stock is a financial tool. It makes M&A cheaper, hiring employees less dilutive, and makes your stock more valuable. And most importantly, having liquidity allows your employees to participate meaningfully in the value they helped create.

If you are a CEO considering liquidity for your employees or looking for a market-driven repricing, please reach out. We’d love to help.