As an investor in private companies, one of the biggest issues you’re potentially facing is a lack of liquidity.
When buying shares of a listed company, most of the time you have a luxury of being able to sell your shares literally in seconds.
It’s not quite that easy when investing in private businesses, though. More often than not, there’s no convenient way to sell (or buy) the shares you hold in a private company. Even if you’re looking to unload your shares of Airbnb, Uber, or some other “unicorn”, you’ll realize it’s not an easy feat. At least it wasn’t until recently.
Warren Buffett’s 2018 Activist Investment
As TechCrunch reports:
On December 4, 2015 President Obama signed into law the FAST Act, which is mainly about transportation funding. Included within the FAST Act is a section, the Reforming Access for Investments in Startup Enterprises (“RAISE”) Act, which codifies a previously unwritten means through which startup employees, ex-employees, early investors, and other shareholders have been legally allowed to sell their shares.
This is a big leap forward, especially considering that unlike during the dot-com mania, startups today are not rushing to go public, but in large part actually prefer to stay private. And for the few that do go public, the returns are, at best, lukewarm as most of the cream has been skimmed by private investors long before.
So with that in mind, today I want to share with you a recording of a conversation I did quite some time ago – back when I was still largely focused on investing in early stage companies.
In the conversation I discuss this topic with Shriram Bhashyam, co-founder of Equity Zen (and also the author of the TechCrunch article I quoted above). Equity Zen is a platform matching shareholders of startup companies (often times these are employees of those companies looking to cash in some of their equity) with outside investors looking to participate in those companies.
And this is exactly what Shriram and I cover in today’s podcast: what are the changes that the RAISE Act brings and, perhaps more importantly, what does the Act mean for us as investors (there’s been quite a few ambiguities around it)?
If you’re even remotely interested in startup companies (either as an investor or entrepreneur), then you’re going to want to listen in.
“Capital formation at early stages has fundamentally changed. It now takes, on average, 10-11 years for a company to go public. There is ample funding available via private markets, and companies increasingly want to retain control and avoid the scrutiny of public markets and sell-side analysts. All of this means that classic public market investors are losing a lot of value to the private markets, as much of the growth is being claimed during the private phase and companies are going public at much higher market cap’s then 10 or 20 years ago.” – Shriram Bhashyam