One of the great challenges of investing in startups has always been the unknown time commitment. In most cases, the only way to exit the initial investment in the new venture required waiting until the company eventually went public in an IPO. The problem with this lay in the number of years this might take to occur. Making investments is more difficult when you are not sure whether your holding period will be four years, five years, or even closer to ten years.
What If Holding Periods Become Indefinite?
In mid march the results of a new survey demonstrated that the time to hold these investments could become longer and the exits more difficult still. One hundred and twenty-six of the attendees at the South by Southwest Interactive Festival took a survey that asked them if and when their companies will go public. Fully 32% of the responders proved to be chief executives or founders. Almost half of the survey takers answered that they anticipated their own businesses would stay private indefinitely. This was a dramatic increase of 62% in the answer to this question over the prior year’s responses.
What they are really saying by this is that they do not see the day when the shares in their startups will trade publicly at all. This rising trend of staying private has been encouraged in the past years by spectacular disappointments of the IPOs of several well known unicorns. Lending Club Corp., Etsy Inc., and GoPro Inc., all debuted recent initial public offerings that declined by over 60% after they went public. Even more recent ones Square Inc. that dropped 9% and Shopify Inc. that rose 6% still performed poorly compared to expectations. Any way you try to explain this, the trend shows that more of the startups are choosing to stay private longer.
The Nasdaq Solution to the Investor’s Problem
The problem with these changes in plans by founders and chief executives is that by delaying plans to go public longer or not going public at all, your exit strategy from the investment just became that much more difficult. What are you to do in situations like this if your particular startup never goes public? Fortunately, Nasdaq came up with an answer a few years ago that is rapidly growing in popularity. It is their subsidiary Nasdaq Private Market which also happened to be the party behind the survey on startups going public. Nasdaq Private Market began offering private companies desperately needed equity services back in 2013. One of the chief benefits of this lesser known exchange is that investors are able to sell and cash out of their startup shares that have been tied up for years.
This new exchange focusing on unicorns came about incrementally. First the U.S. Congress altered the legislation governing how many shareholders could participate in private companies. By raising the numbers of participants in these private companies from the previous limit of 500 to 2,000, they made it practical for Nasdaq to open the new exchange. Nasdaq Private Market then acquired a rival company SecondMarket Solutions in 2015 to become the dominant player in the field. As they continue to integrate the two companies’ technologies and personnel, the combined exchange has been able to offer more and greater services to the startups and you the investor as well.
Just last year, the NPM platform handled $1.6 billion of secondary transaction volume. Their median transaction size rose to $24 million. The profile for the average company on the exchange is a nine year old unicorn that employs 440 individuals and boasts a typical value of around $1.8 billion.
How Nasdaq Private Market Helps Eligible Participants
The way this exchange works is fairly straightforward. The startups that decide to stay private longer (or indefinitely) come to Nasdaq Private Market so that they can have an equity share manager in the exchange. The startups are able to offer employees with equity stakes liquidity to sell them. More importantly for you the angel investor, this permits investors from the early stages of the startups to be able to exit your investments. You are no longer at the mercy of the startup deciding to go public. Companies that have taken advantage of this exchange and its services so far include big names like The Motley Fool, Pinterest, Tango, and Shazam.
In order to participate in the exchange, you have to become an eligible seller with Nasdaq Private Market. NPM offered a breakdown of their sellers from the end of 2015. At the time, eligible seller participants included 67% in present employees of the startup company, while 22% proved to be former employees, and 11% were investors in the startups. The percentage of investors who take advantage of this excellent and still relatively new service to cash out of their investments in startup companies is likely to only rise as more of them become aware of it and go through the necessary steps to become approved sellers.