The Blurring Of The Public And Private Markets

Five or six years ago, as the USV team was discussing the evolution of late stage financings and secondaries on the venture landscape, our partner Albert described something to us that was, in hindsight, very prescient. He said “there is no reason why there is such a bright line between public and private markets, we should have one market where the more a company discloses, the more liquid their security becomes” (or something like that). His point was that the only thing that really matters is how much information a company is willing to disclose.

We are increasingly seeing what Albert described to us come to pass. The ability to raise large sums of capital from public market investors has been available to privately held companies for a number of years now. There is no real difference between the public markets and the late stage growth markets in terms of availability of capital. That was not true a decade ago.

With the recent SEC adoption of Title III of the Jobs Act, non-accredited investors can start investing in private companies. There are limitations and reporting requirements which will certainly limit the adoption of Title III fundraising, but even so, we have crossed a threshold here that should lead to more individuals investing in privately held businesses over time.

Privately held companies are increasingly using electronic stock ledgers (like the one our portfolio company eShares offers) which allow them to easily manage a large and rapidly changing cap table, much like the function that brokers and transfer agents provide in the public markets.

So, as you can see, we are slowly witnessing the blurring of the lines between the public and private markets.

But maybe the biggest “tell” is the recent brouhaha over Fidelity’s public markdowns on its holdings of well known startups. One of the many reasons companies don’t want to go public is they don’t want to have to deal with a valuation that moves around all the time without their ability to manage it. Well guess what? If you raise from certain investors in the late stage growth market, you are doing that, even if you didn’t realize it.

I don’t think we will see less of these public markdowns. I think we will see more of them. And we VCs are now facing the choice of whether to markdown our portfolios in reaction to Fidelity’s markdowns or explain to our investors and auditors why we did not do that. Since our quarterly holding values don’t really matter to us (cash on cash returns are what matters), it’s easier to markdown than discuss why we didn’t do that.

It’s interesting and noteworthy that when the private capital markets got the benefit of large pools of capital coming in, that came with increasing transparency. Of course it did. We just didn’t realize that was going to happen. Staying private won’t shield you from the pains of going public. Because the lines are blurring between the private and public markets and we are in for more blurring and it will come faster in the coming years. Be careful for what you wish for, you may just get it.