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Carta, the nine-year-old San Francisco-based capitalization table management and valuation software company, has just raised $ 500 million in its eighth funding round, for a valuation of $ 7.4 billion. dollars. That’s more than double where the company was valued eight months ago when it closed its seventh round of financing at a valuation of $ 3.1 billion.
With so much money pouring into private companies, the leaps and bounds in valuation are no longer so noticeable. What’s different about this particular story is how Carta’s new valuation was established, which she said was to hold an auction using her own trading platform to sell $ 100million. dollars of his shares to secondary buyers, and then to use the valuation at which the shares were sold – $ 6.9 billion – as evidence to major investors of Carta’s true worth.
For a company trying to market their trading platform – Carta also wants to sell more secondary stocks of other companies – this was a smart marketing game. It was Carta eating her own dog food, in the somewhat repulsive language of the startup world. Still, it’s not clear if we’re likely to see it replicated by other companies in the future.
First, what Carta has done is – in our opinion – unprecedented in setting a price for secondary stocks. Typically, a small group comes together and negotiates a price or, if it is 20 or more sellers who are willing to sell shares to buyers, this is considered a ‘takeover bid’ and involves a prospectus-like document, including financial statements, risk factors and all that other jazz, that is sent to an established group of potential buyers.
In Carta’s case, as Carta CEO Henry Ward suggests in a new post on Medium, by holding an auction process, many more investors were involved in discovering the price of its shares than it did. would have been possible otherwise. (An earlier article by Ward indicates that 414 attendees participated in 1,484 completed orders.)
The business makes a lot of sense, says longtime lawyer Tim Harris of Morrison & Foerster, who was not involved in the process but studies the effectiveness of the market. Ward basically says, ‘We’re using a broader market price research process instead of what he describes as one-off. “You see it all the time in real estate listings,” adds Harris. “There is no reason why companies cannot do the same. “
The question startup founders may be asking themselves right now is whether an auction process like Carta’s can really help set a price for primary stocks. Of course, Ward says yes. In his article on Medium, he argues that the auction greatly bolstered any arguments Carta could make to investors, including Silver Lake, which ultimately led Carta’s last $ 500 million round. (It was a Series G, and Carta has now raised $ 1.29 billion in total, he tells us.)
While we have no doubts that this was a useful data point, Silver Lake is a sophisticated investment firm that has been evaluating companies for 21 years; probably he would have arrived at the valuation he made without that earlier auction.
Meanwhile, there are other reasons to believe that an auction like Carta’s will remain an outlier.
For his part, attorney Anthony McCusker, who co-chairs technical practice at Goodwin Proctor, wonders if “companies are going to outsource their valuation discovery to Carta.” Most founders and CEOs would rather speak directly with investors when it comes to establishing the valuation of their business rather than relying on the wisdom of the crowds, he suggests.
Markets can also be “played out,” as Harris from MoFo notes, observing that the integrity of any platform “depends on the oversight and quality of the offerings on a platform” (Harris half-wonders this. which happened, for example, to the bidder who said he or she would pay $ 28 million to join Jeff Bezos on his trip to space, then later cited “scheduling conflicts”.)
As for us, one wonders how many founding teams are ready to open the secondary sale of their shares to a potentially much larger circle of funders when, historically, they have not done so. We also wonder if, for some companies, this discovery process could backfire. Carta is a highly prized commodity, after all, but it’s easy to imagine scenarios in which the side actions of companies aren’t worth to outsiders what the founders think they are.
Of course, the industry is changing so fast that not much would surprise us at this point. Indeed, whatever happens, the auction is clearly part of a larger trend towards transparency that continues to play out in new and interesting ways all the time.
As Harris notes, when he began practicing law 26 years ago, “the risk was a completely closed ecosystem.” Today, he says, “a wealth of data is shared and disseminated to make smarter business decisions. You can just go to Pitchbook or Crunchbase to learn a lot of what you need to know.
Featured Above: Henry Ward, Founder and CEO of Carta.
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