Increasing the GDP of the private markets

Infrastructure enabling 100x more startups to exist.

Startups are good for the world and luckily they are designed to fail or succeed fast. To get things done fast, you need a small team and a deadline; nowhere is this more common than in the startup world. Small teams build tools like Whatsapp used by 350 million people with only 35 engineers or Notion with a team of 42 and 4 million users. Infrastructure or the “work on top of the work” is just as important. DARPA has 120 people in finance, contracting, HR, security, and legal departments supporting 200 programs at once. It might also surprise you that startup accelerator Y Combinator, has a team of less than 100 people supporting company cohorts of 2-400, 2-3 times a year. From finding lost Einsteins in the world to launching a company with a couple clicks, it’s only becoming easier to take the leap and build. We’re in the early days too! The private market is currently at about 10% the size of the public market and I’m excited for a world where infrastructure for 100x more startups will exist.

Increasing the GDP of the private markets — the slogan for a class of private market infrastructure companies. They help builders and investors start, fund, and operate more effectively by standardizing processes done by spreadsheets, lawyers, and fax machines. At first, this looks like software companies eating into the margins of legacy service-heavy businesses, but a closer look reveals the plumbing of an industry changing. Symptoms can be seen in the number of yearly IPO’s drying up, abundant capital entering into the startup ecosystem, 10.5 million new business applications in 2021 and 2022, and only 0-4% of wealth advisors portfolio’s in private investments.

With the surge of investments, companies, and assets, following funds and companies from formation helps sort these companies into natural problems to solve:

• Formation

• Fundraising

• Valuations

• Operations / Management

• Transactions

The blueprint

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To builders and investors, these are just hoops to jump through so they can get back to building and investing. This makes for a high bar for how painful and urgent each of these problems are and how much a product can save them time/money. We used to joke at Carta that software for cap tables needed to be 10x better than just emailing your cap table spreadsheet to lawyers. The blueprint for a company in this space is usually a mix of software and services and looks like this:

1. Automate a spreadsheet or document process

2. Create standardization

3. Capture an atomic unit

4. Innovate with the data captured

To illustrate this, here are a couple examples:

1. Find a spreadsheet or document process that causes lots of headache

   • Carta → Cap tables, option agreements, and paper stock certificates

   • Affinity → email, calendars, google sheets, and project management software

   • Pave → compensation and headcount planning

2. Create standards for how that process can be done 80% of the time

   • Carta → create an option grant → add 1/48th monthly vesting → send to employees to sign

   • Affinity → create a list → sync your email → manage your deals and relationship

   • Pave → connect your HR software → create a compensation program → apply it to your employees

3. Pinpoint the atomic unit you are capturing

   • Carta → asset ownership of a company

   • Affinity → contacts and company profiles

   • Pave → employee cash and equity compensation

4. Envision what the world looks like once you’ve captured at least 51% of the atomic unit

   • Carta → create liquidity for private companies and investors

   • Affinity → Bloomberg messaging for the private markets

   • Pave → real-time compensation benchmarking

This is the business of structuring unstructured data and finding the right entry point is key to these products. If done right, it will create a sense of urgency to give your product a chance. Recurring compliance driven events like Form D filings, 409a valuations, or K1 filings, are often a goldmine to explore. A guiding question to ask here is: what are burning problems surrounding the process you are standardizing?

It’s also worth nothing that steps 1-3 above will be a complete slog to get off the ground. To fill in the gaps, services can prop up customer experiences until you’ve figured out how to automate it. Some companies will inevitably realize that they can’t completely automate services they provided with technology. A guiding question to ask here is: can the services part of the experience eventually be self-serve or 90% automated?

The opportunity to influence and change infrastructure comes once you’ve structured the data. Think about it as earning the right to innovate and solve more problems for your Customers. A guiding question to answer is: what other problems can we solve for Customers do once their data is structured in a central database?

Examples of this:

1. Passthrough is building Okta for all Investor identity, where investment platforms will have use them as a single sign in.

2. Carta turned 409a valuations into a business with software margins. They also have ambitions of building a marketplace for selling private company stock because they’ve mapped out the ownership graph.

3. Stripe Atlas turned the first 10 steps to starting an online business into software. They will eventually turn the next 50 steps of managing and growing an online business into software.

The future

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Infrastructure is shaped by regulation and history teaches us that regulation is created reactively to overlooked parts of the financial market blowing up. This is why we can’t have nice things. Sad to think, but it’s likely that changes to infrastructure will come with the next financial crisis. The cryptocurrency industry is going through this in real-time with FTX and will likely result in new regulation. Further back, Generally Accepted Accounting Principles (GAAP) and the creation of the SEC came from the 1929 stock market crash, the Sarbanes-Oxley act came from Enron scandal, Dodd–Frank came the Global Financial Crisis of 2007-2008, and the list will continue to grow.

The future states of the private market could be:

1. The private market will look nothing like it does today. Companies will form as LLC’s, fundraise from anyone in the world, use securities that create more alignment between stakeholders, and the model of venture capital will transform to being more aligned with founders or be replaced by something completely different (I’m pretty convinced it’s debt and will write more about this later).

2. A heavily regulated private market — this is a simple exercise of looking at governance of public companies and retrofitting it to the private market. Silicon Valley Sachs will exist (a16z is the closest to this). Asset-backed securities like what’s happening with recurring revenue will be more prevalent. Companies building vertically integrated infrastructure will win in the long term here by decreasing costs and friction in the Customer experience.

3. The status quo — the private market looks the exact same as it does now with more efficiencies, participants, and some clear winners in the space. The battle between horizontal and vertical integration will continue due to a lack of interoperability. In this world, companies building middleware or Integration Platform as a Service (iPaas) will benefit in the same way Plaid did with the boom of consumer fintechs.

Conspiracy theories (maybe things to build)

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• Why is a Delaware c corp the norm for companies? Other entity types could be more beneficial for Founders. Yes most private companies are LLC’s but almost all venture-backed companies are Delaware c corps. The reason behind this is because it’s familiar waters for Investors, not companies. There are also major tax advantages to forming as an LLC (I’m planning to write more on this).

• Why is fundraising (setting a valuation and running a process) still a blackbox for founders? What happens when the investor accreditation laws shift? Why isn’t debt more well understood in Silicon Valley?

EB: There are no standard ways for how valuations are measured in the seed ecosystem. Standardization can bring consistency to understanding startup values and fund performance. This translates to a lower cost of entry, which will be enormously helpful for the industry. Link →

• 409a valuations and ASC 820 company valuations are often different and no one really talks about it (anyone who does valuations for sure has this data). Who is really benefiting from the mysteriousness of valuations?

• Why are investor relations completely underdeveloped for companies? Some of the most key people at VC firms are investor relations and where GP’s will spend most of their time in the early days.

• Why isn’t there a real-time benchmark for funds (like Pave)?

• Why hasn’t anyone been able to crack private market liquidity? Is it a problem that doesn’t want to be solved in the current infrastructure?

• Why doesn’t a Plaid for private market assets exist? In the current state, fintech companies move slower and custom build integrations with each piece of private market infrastructure.

• What does a low cost diverse venture ETF look like? (Companies like Titan and Destiny and have started to experiment with this)

Private market infrastructure companies

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• Formation → Stripe Atlas, Capbase, Firstbase, Doola, Pioneer

• Fundraising → Stonks, Capital, Fairmint, Angelist, Carta, Affinity, Opto Investments, Sydecar, Syndicate, Vauban, allocations, Anduin, Passthrough, Floww

• Valuations → Derivatas, Pulley, Carta, Meld Valuation, Eqvista

• Operations / Management → Pulley, Standard Metrics, ledgy, Carta, Affinity, Addepar, Arch, Pave, Sacra, Aumni, Eqvista

• Transactions → Forge, SecondMarket, Carta, Tap

Please reach out if I missed your company!

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Thank you Max Estes, Nathan Kapjian-Pitt, Michelle Espinosa, Deny Khoung, Dylan Anthony for your feedback and help!