(0:45) - A New Marketplace for Pre-IPO Trading
(6:00) - How Forge Creates Value for Unicorns and Investors
(8:25) - Innovation with Spotify and Slack: What's a Direct Listing?
(12:15) - A Herd of Unicorns: Growth Potential for the Pre-IPO Market
(15:00) - Episode Roundup: Podcast@Zacks.com
Welcome back to Mind Over Money. I'm Kevin Cook, your field guide and story teller for the fascinating arena of behavioral economics.
Well, I'm back after a little hiatus in the podcast and I'm excited to kick-off my second-wind with today's guests from a small company, with a big disruption for the stock market.
As an instructor and then a trader two decades ago at one of most innovative financial marketplaces, CME Group (CME), I've always been interested in understanding market structure and how it evolves, including the essential institutions like exchanges and investment banks that allow capital to flow and function with relative fairness, access, and liquidity.
Just as markets are not static, their structures and functions are constantly changing too. Today I'm looking at an evolution that I think will become a very important part of market structure: the new stock market that is occupying the space before a company decides to launch an IPO.
Get Ready for a Herd of Unicorns That Don't Have to IPO
Investors know "unicorns" not as the mythical creature of fairy tales but as the moniker for private companies whose valuation exceeds $1 billion. In this decade, with so many high-profile IPOs exceeding $10 billion, maybe that order of magnitude boost will become the new threshold.
In any case, there is about to be a lot more unicorns running around who don't feel compelled to come to Wall Street for an IPO. And thus their average market cap will also swell that way.
Here's how Forge Global, a new type of stock exchange was first described to me...
Experts predicted that 2019 would be the year of unicorns, with highly valued start-ups going public left and right. While we did experience some eagerly-anticipated IPOs from the likes of Uber (UBER), Lyft(LYFT) and Pinterest (PINS), many unicorns are choosing to delay their IPOs -– thanks to secondary marketplaces disrupting the process by allowing pre-IPO trading. Founded by two of the youngest Y Combinator alumni -– Sohail Prasad and Samvit Ramadurgam –- Forge (formerly Equidate) is one of these game-changers.
In the podcast linked to this article, I get to ask Sohail and Samvit about their innovation and what it means for companies, founders, employees, venture capitalists, and the traditional Wall Street investment machinery.
Because of this new marketplace of liquidity for all these players -- including giving accredited investors access to unicorns -- companies can stay private longer and maintain all the benefits of entrepreneurial control and creative freedom they are accustomed to without the SEC spotlight or the Wall Street treadmill of meeting analysts and beating their quarterly estimates.
Sohail and Samvit also gave me a very surprising prediction about how big this "pre-IPO" unicorn market could grow from its current size of about 100. Until you listen, check out some more things I learned about Forge and its two bright young founders.
Many VCs and Wall Street Banks Welcome the Disruption
Forge has raised over $88.5 million in funding from Peter Thiel and other notable investors. To date, the platform has facilitated the trading of hundreds of millions of shares pre-IPO -– including those of Slack(WORK), Spotify (SPOT) and the still-private Airbnb.
Interestingly, both Spotify and Slack came to Wall Street with a "direct listing" offering, but only after their shares found essential price discovery on Forge. One could say that the price information created by sellers and buyers on Forge was instrumental in the successful direct listings of these companies to the public.
The founders also explained in the interview how this fantastic enhancement to the stock market works along with pre-IPO trading and why it could become a more popular model as it gives companies and investment banks clearer valuation discovery and pricing.
In short, the "rush" to IPO is no longer as urgent with this new marketplace model. And this will create hundreds more private unicorns.
In the podcast, I detail all the players from company founders and employees to VCs and investment banks who benefit from this evolution in the stock market ecosystem.
For instance, unicorns can now sell shares directly to non-VC investors, thus capitalizing on high valuations and expediting funding, without having to rush an IPO. This also allows unicorns to bypass the traditional VC funding model so they don’t necessarily need to go to VCs to invest in Round X of funding.
They can just sell their shares and keep innovating without additional layers and dilution in the capitalization table -- and without additional outside involvement.
Meet the Founders Who Specialize in Helping Founders
Sohail Prasad was one of the youngest founders to go through Y Combinator at just 18 years old. A fellow Y Combinator alum, Samvit Ramadurgam started cloud storage company Streem, which was acquired by Box in 2014. Together, they are founding partners of S2 Capital and have invested in over 100 start-ups. They love to discuss how platforms like Forge are disrupting the late-stage VC model, when investors should consider private vs. public stocks (including the pros/cons), and how Forge customers have achieved pre-IPO success so far.
More About Sohail and Samvit
Sohail is a Founder & President of Forge, with has an extensive background in product management, engineering, and business. At 18 years old, he was among the youngest founders to go through Y Combinator. Over the years, Sohail has advised and invested in over 100 startups, including Zenefits and Rappi. He continues to invest actively through S2 Capital, and serves as its Founding Partner. Prior to founding Equidate, Sohail managed mobile product at Zynga. He previously joined mobile advertising firm Chartboost as its second engineering hire, and has held roles at Google and the MIT Media Lab. Sohail was awarded TCU's Texas Youth Entrepreneur of the Year award in 2010, and was later named a Thiel Fellow by the Thiel Foundation. He previously attended Carnegie Mellon University where he studied Electrical & Computer Engineering.
Prior to starting Forge, Samvit went through the Y Combinator program and started his first venture-backed company, Streem, a cloud storage company which was acquired by Box before its IPO in 2014. Samvit is an active angel investor and has invested in over 100 startups through S2 Capital, where he serves as founding partner. His previous work spans numerous startups, including Asana where he built out distributed systems infrastructure and Livemagic where he developed audio fingerprinting algorithms. In a previous life, he conducted research on high temperature superconductivity at the Lawrence Berkeley National Lab. Samvit holds a BS in Electrical Engineering and Computer Science from UC Berkeley.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research. In a former life, he was a currency market maker at CME Group where he traded $100 million per day providing spot and futures liquidity to the largest banks and hedge funds on the planet.
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