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Late stage secondaries

This is the third in my recent posts about investing (100 Companies, Investment lens, what I’ve been up to). More about the discoveries I’ve made the past 18 months or so. This post is on secondaries, that is buying shares in later stage startups. This is an area that has been getting more and more democratized. Examples might be a SpaceX or a Stripe.

The present market state, is such, that for institutional investors who want exposure to future IPO companies there are a lot of options. For individual investors the options drop off compared to that but are still available.

Who can do this?

Typically the minimum is $50k, however some platforms come down to $10k depending on the deal. So these are sizable investments. Which hold a lot of risk, an IPO or acquisition isn’t certain. However you can buy in to quality companies that you want to own.

You also need to be a qualified individual under US law.

How are they structured?

Typically the firm creates a SPV to hold the secondary shares and you are buying units in that entity. You can hold the units directly or you can hold through your own entity.

Can you buy a ‘fund’ of secondaries?

Yes, most providers either offer these in batches over time or continual funds.

Where do they get the shares from? Why are those people selling?

Typically these are early employees selling their shares, it can also be funds from early investors selling a portion of their stock. You might think they’re crazy to sell stock in such a hot company. But these holdings might represent most of their gains or all of their net worth. A smart individual would sell some, to at least pay off the mortgage, diversify.

The other thing is, life happens. The employees may have left or are leaving. Tax bills arise.

But you are right to be skeptical, maybe they are selling as bad things are on the horizon. Be attentive if you’re seeing a lot of sales or a depressed price. That is where your own due diligence needs to come in, a long term outlook and to listen to the market.

The final way is some firms offer financing for startup employees to exercise their option or to buy their options if they are leaving. If they finance the exercising of the options, they typically take some upside. So in each case they are on-selling their asset.

Right now, you also have to question why aren’t they going public now? Typically they have access to capital and a good plan to keep growing in the private markets. Or they have more work to do to get the business ready.

Information issues, rights & lock ups

Because these are secondaries, you are going to get imperfect information. Prior financing may have additional warrants or the total amount of issued shares may be inaccurate. Typically they are close but don’t go in to this expecting to lift the kimono and see everything.

The next thing is rights, you likely will not get information rights to receive updates from the company. And also will not get a vote etc. You just get the exposure to the upside.

As these are employee shares, you will likely be held to the same employee lock ups. Meaning you may have public stock for 3 or 6 months. Further for tax compliance, you will receive K1s each year.

How do the firms offering these make money?

The firm offering it will charge a placement fee and take some carry. Carry will be calculated on the IPO price, or an average of the last 30 days of trading if a lock up period is in place. There may be a management fee as well to maintain the entity and compliance.

Imperfect pricing

To set expectations, because this is a secondary and limited supply available, you are typically going to get imperfect pricing. You may be buying at a discount, or a premium to the last round.


  • Be fast, hot companies can get allocated very rapidly. As fast as 8 minutes I’ve found.
  • Friday, I tend to see the offerings coming on a Friday. I’m not sure why, my guess is that they’ve spent all week finalizing the details and now need to get it out.
  • Complete your KYC details early. KYC is know your customer and requires validation of who you are, or your entity, and your role in acting on its behalf.
  • Insidery, hot companies are going to go fast so often *may* be provided to their top or most frequent investors first. I haven’t seen this as a strict policy but observed it happening. So do put the highest allocation you could make when you indicate interest and let your account manager know your interest or flexibility.

Who are some of the firms that offer these?

  • MicroVentures, from my observation they appear to have the best deal flow for ‘retail’ like investors. They provide companies, small funds with a collection of companies.
  • Forge, they merged with SharesPost to offer a broader array. They also have a good volume of deals.
  • EquityZen, a generalization but they tend to have more media/NY offerings. Lower minimums.
  • EquityBee, is similar to EquityZen, they also tend to have a mix of different types of companies. Lower minimums too.

Those are the main ones. The Forge founders are also working on a new company, which may yield new options in the future.

Here are some offerings that *may* in the future offer more options for retail but offer options for those with larger commitments:

CartaX is more for institutional right now, but may have more retail like options in the future.

SecondMarket, acquired by Nasdaq also is on the same path. Providing offerings in private companies.

SecFi, they fund employee options and take a portion of the upside, and will sell some of that exposure.

GSquared, they also offer options for family funds.

What about Crypto?

There have been coins been sold against soon to be public companies, like Coinbase & RobinHood. The coin represents, converting the initial capital at the first day of trading. So this gives you synthetic exposure without underlying stock ownership. This is a space I would expect more to happen over time.

August 28th, 2021

The challenge across investment classes

I missed out on investing in Instacart, relatively early on. A buddy of mine did not. Another buddy also passed. If you fast forward to today, Instacart (even prior to covid) was valued at $7.9b and now $39b in the last round. That is an insane multiple.

So what went wrong?

At the time, when I saw it, I liked the idea and the convenience. Very early the proposition was about getting a red bull or a couple of items to you fast. Then in New York it enabled delivery at supermarkets which was less common at the time. We even used the service a bit.

What I didn’t like, is I couldn’t see a long term sustainable business model. The discounted delivery fee wouldn’t pass on, consumers wouldn’t pay for an increased margin on products.

The knowledge, that yes they could improve the operation as they scaled, they could find new ways of generating revenue (like advertising) and their team could execute brilliantly – was in the back of my mind. However, not enough to press go.

In evaluating I was thinking like a value investor, not a growth investor. It was clear from a growth perspective they could grow significantly and ideally solve some of the challenges with scale. A growth investor would have gone yup lets do it.

That’s not to pass judgement on my investment lens. It’s just for that investment, at that time, with the type of capital it was the wrong one.

It’s also a lens that has limited my opportunities with Crypto, I’ve mostly struggled with seeing the big picture and where the real tangible value would be created, or created through exchange.

And for me personally, I invest resources through Nudge, board positions, early stage investment, late stage and then income, retirement and a fun account. This is a primary function, resource allocator.

Swapping investment lens in each scenario has taken some work, to sit and define how I should be thinking about investment allocation in each scenario. What is the most appropriate way to evaluate each of these. But a fruitful exercise. It’d be insane to take a crypto investment lens and apply that to retirement investing. The defining of that has been immensely helpful, to hone my own thinking and to help in swapping context.

The mental short cut is to entrust your funds to experts who will make those judgements. Find an expert in Crypto investment, evaluate them, their lens, knowledge of the space. And back them. That’s why index funds are so valuable to investors, for the same reason. You can always change at a later date when or if you want to get more involved.

Extrapolating that out to other areas, it’s the same as hiring a personal trainer, rather than figuring everything out, get someone who knows the road and makes the calls based on your own results or progress.

August 26th, 2021

100 Companies

One of my emergent post-covid goals is to invest in 100 companies over the next three years. The key aim is to learn, to have fun and a bit of adventure. And of course make some money along the way.

Now the problem with that sort of number of companies (and ambition) is that that is a monumental undertaking. I don’t have the capacity to find, sort, filter and do that many deals. However the way I am addressing it, is by finding a few funds or syndicates, that enable me to do that.

The first is FundersClub, FundersClub shares direct investments and fund investments throughout the year. Of note is they do a Y Combinator round each year, going in to a selection of Y Combinator companies.

The second is, Angel Syndicates, finding a few managers who I think will sniff out great deals. You join their syndicate and those deals are shared with you. You can either back every deal they do or back individual deals as they come through.

The third will be a mix of private direct deals, either sourced by myself or from my networks. I haven’t used either Assure or RUV yet for structuring a deal. The former lets you put together a SPV for a direct deal, RUV also offers the same sort of service. Letting you and a few friends invest together.

Separately, I will continue to explore the secondary markets, follow on into prior investments. The secondary space has a bunch of innovation. Maybe I’ll do a follow up post on that and the opportunities it presents.

The benefit of the approach above is, low cognitive load but also gets me in to companies I might not have because of my own selection bias, with this approach I tap in to a bunch of different thinkers who would tackle opportunities I wouldn’t take a second look at.

For me a big driver of this is learning, taking a small stake typically means there is no real engagement with the firms but you do get access to updates. However some of the private deals will mean more involvement. But so, by getting such an expanse of companies and an understanding of where they’re investing, challenges they’re facing, seeing the public view vs behind the scenes view and how their journey evolves. That is a bunch of learning!

As we navigate the emergent economy, what better way than to get a broad view from a bunch of companies.

August 3rd, 2021

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