Is Equityzen a Disruptive Innovation?
A marketplace for private investments, with over $380M in equity value
When people refer to EquityZen as the NASDAQ of private markets, it’s not because it’s a stock exchange where brokers route orders for investors who think a company has good prospects. EquityZen has earned its nickname because it has proven to facilitate an online platform that allows accredited investors to buy shares in companies that are still privately held.
Platforms like this are based on the mechanics of something called private placements — they follow standardized protocols to help private companies or their shareholders sell their shares, all with company approval, and make money through commissions from the sell side and buy side. When companies stay private longer, it often leave early investors and employees, with equity stakes of those companies, marooned with nowhere to liquidate their assets. Take, for instance, the advent of Palantir Technologies raising $200 million in its latest funding round. EquityZen challenged the assumption that investors can’t buy shares in such private companies, and gave rise to a whole new market.
It’s this type of innovation, sometimes seemingly very small in the beginning, that require entire markets to be reimagined. And with a business model focused solely on providing a “match-making service” to an illiquid market, EquityZen has the potential to reinvigorate the function of secondary markets.
To give insight into what exactly I mean, I would lay out three unique characteristics about the company and why I think these qualities are traits of a disruptive innovator. These attributes are by no means comprehensive, but they should help illustrate what I mean.
1. A focused company
In a world focused on getting bigger fast, it’s all too easy to overreach. Consider what’s happening to banks today. They have been trying to do every function from checking & savings accounts, payments, managing investments, growth loans, small business loans, credit cards, mortgages, and etc. And as they’ve meandered away from their core business, there have emerged “focused” Fintech competitors like Moven, Square, Betterment, Lighter Capital, Kabbage, and PayPal, each one of them focused specifically on one of those functions/job, and thus causing banks to lose their salience.
Similarly, the stock exchanges, initially owned by brokers, whose function was to market new company shares, in exchange for a fee, have now been taken over by investors, private equity companies — who are not necessarily interested in growing small companies and going public, but instead just generating a monthly return. As a result, they have become unfocused and no longer provide much useful services to corporate issuers.
In contrast, EquityZen is a focused Fintech innovator. Their sole mission is to provide liquidity to startup employees by unlocking the value of their equity compensation (i.e. stock options) in a way that benefits the employer, shareholders, and the investors. They have solved the puzzle of giving accredited investors access to pre-IPO company shares whilst keeping employers happy. And I’d predict such Fintech innovators could slowly but surely become the face of the financial market.
The type of disruption I’m referring to does not necessarily start at the periphery of the market, it’s coming from orthogonal industries with rich information synergy. It’s starting where the origin of data is, then positioning the data-enabled network to attack an incumbent industry.
2. Unique Infrastructure
With a derivative infrastructure that allocates the economic rights of shares, without necessarily transferring legal ownership, EquityZen is able to make the process of private placements very company-friendly. They do so by circumventing the impossible task of providing shareholders cash for their illiquid equity without any effect on the company’s shareholder count or capitalization table.
In a nutshell, it’s a secure interoperable network where private transactions are automated, making it an efficient, yet very user-friendly, and affordable marketplace. Investors are charged a one-time 5% sales fee, and they can invest as little as $20,000.
And also, employers are given the option to edit corporate actions and cap tables, add or export employee data, add funding rounds, and etc., thereby reducing the costs and overhead associated with conducting private securities transactions. But most importantly, this allows them to have control over material nonpublic information (i.e. proprietary information that can move a company stock). The convenience of the platform is one of the most obvious, and easiest to differentiate, factor.
What has enabled this construct to work is the modest operating costs of EquityZen. As a platform, because they don’t manufacture tangible goods or hold inventory, they are able to bring investors and private companies together in a viable manner. And network effects protect their position; thus users are incentivized to stay on their vibrant platform.
3. Firsthand empathy
In terms of who succeeds in a given market, the fundamental question is and has always been, “Who understands the customer better?” EquityZen, for one, spends a great deal of time and effort establishing relationships with investors and proven tech startups well before the exchanges, thereby building credibility with them. However, another important aspect of this initial relationship is them gaining firsthand empathy for what the consumers of the product one level above theirs in the market actually want.
For instance, we’re more likely to see EquityZen succeed at launching a public-market exchange than to see the NYSE succeed at creating a private placement service like EquityZen. Both companies market securities, but, assuming that new regulations allow anyone who has a securities license or professional knowledge related to a specific security to participate in private placements, and that private investments become the dominant model for investing, EquityZen has the advantage of knowing exactly what it needs in a bourse for such a service.
However, disruption can take time. For now, Fintech innovators should focus more on getting the business model, rather than merely the product, just right, and husband some of their resources to become Network Orchestrators. A good approach for startup platforms is targeting customers in a relatively narrow market where the platform can more readily gain momentum.
For instance, the Yelp review site, which now evaluates millions of local businesses like dentists, hair stylists and mechanics in the United States (and many from abroad too), initially focused on a much smaller market: ethnic cuisines in San Francisco. With that foundation, the company attracted millions of dedicated reviewers and visitors. Word of mouth fostered growth — from covering other cities and then to reviewing other businesses. As it naturally grew, Yelp moved on to other functions, such as delivering online orders and accepting reservations.
Having built an all-rounded review platform, Yelp could have tried going headlong publishing reviews of all businesses everywhere since its inception. Instead, it stayed focused on a narrow sector until it had attracted devoted followers and a very high-quality content, which paved the way for later success. EquityZen seems to be following the same approach. By focusing on late-stage private technology companies, they’re gaining traction in the private market space, and fans like Savneet Singh are keeping the word out there that “EquityZen gets shares of companies that others don’t.” With this model in play, they are laying the foundation for more players to join their venue.
To become a Network Orchestrator and create more value and better performance, EquityZen could connect to and activate its network, tapping into new sources of value, both tangible (its network of shareholders) and intangible (the expertise of its WealthForge broker Network). I’d recommend the following:
- Add network Key Performance Indicators Add to the company’s key financial metrics, new network-oriented indicators such as number of participants, their opinions, and level of engagement. These KPIs (i.e. customer loyalty metric) will provide direction for the firm’s network adaptation.
As first envisioned, Financial technology companies are taking over the financial industry. I think it was, Marc Andreessen, who said “Most good startups have maybe a five-year window before they start to get locked in a pattern of doing business with a particular kind of customer and these disruption opportunities emerge.” EquityZen’s move to build its own platform could — as long as it allows EquityZen to differentiate its products in terms of price and/or reliability — be a deciding factor in whether or not it succeeds. With investment comes growth; however, when investing to create growth, keeping that focus is very important in order to succeed.
