Meditations
EquityZen's Blog On Startups and Their Economics

The EquityZen Seller Video Series — Part I

Richard Stratford | October 19, 2017

Shareholders behold!

This week we're proud to bring you a short video wherein we show you how EquityZen smoothens the once-convoluted process of getting liquidity for your private shares. We understand how daunting the process of selling your equity may seem, but we're here to demystify that concept and help you navigate these tricky waters.


Learn more about selling your equity here

What's inside the box

Selling your equity is a big step. For some, it's the last obstacle that—once hurdled—can directly open the door to a new home, the financial security of a loved one, or simply the diversification of an investment portfolio. Below are a few of the larger points we hope you take away from this video:

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Some Thoughts on Open Source Software in the Public Markets

Catherine Klinchuch | October 12, 2017

This analysis was conducted by EquityZen Securities LLC.

Public market investors like to see [fill in the blank]. We could put many adjectives here. Very few seem to correspond with the adjectives often used to describe open source software (OSS) companies.

With several of these vendors gearing up for IPO, including MongoDB (filed S-1) and MapR ( reported ), we often get asked how OSS models fare in public markets. The challenge in answering this question is that it's somewhat unclear. There are not many publicly-traded companies whose business models are based on monetizing open source software. Only two — Red Hat (NYSE: RHT) and Hortonworks (NASDAQ: HDP) — have trading histories long enough to analyze. And how have those two fared? Well, differently…


Source: Google Finance , EquityZen estimates

With these data limitations in mind, we offer some preliminary thoughts on developing a framework for evaluating open source models.
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Some Thoughts Regarding ForeScout's S-1

Catherine Klinchuch | October 05, 2017

This analysis was conducted by EquityZen Securities LLC.

ForeScout filed an S-1 earlier this week, marking its first step towards completing an IPO. ForeScout expects to list on the NASDAQ under the ticker “FSCT”. The S-1 was (long) expected as the company had reportedly filed confidentially early this year.

We believe comps point to a $1.1-1.7B valuation for ForeScout

ForeScout’s expected pricing range is still TBA. Comparable public companies trade at a mid-to-high single digit multiple on sales, as shown in the table below. Note that ForeScout generates revenue from hardware & software sold on a perpetual license (vs subscription); as such, we would expect its relative valuation to fall below companies with SaaS models. Our valuation estimate uses a P/S range of 5.0x-8.0x and assumes 2017 revenue growth continues at its YTD pace of 30%. Note that ForeScout’s last funding round implied a $1.1B valuation.


Source: Google Finance, Company Filings , EquityZen estimates
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Cybersecurity Startups: Hacking into a Growing Market Opportunity

Catherine Klinchuch | September 14, 2017

As the world grows increasingly digitized, from cryptocurrencies to the interconnectivity of social media platforms, it has never been more important to protect your data. In the wake of the catastrophic Equifax data breach , cybersecurity has become of the utmost concern for every day citizens. The cybersecurity market has grown to $120B, underpinned by an increase in the frequency and severity of cybercrime over recent years. As cyber threats have increased, though, legacy technology has become increasingly less effective at mitigating them. For a detailed analysis of the industry and the major players in this sector, please download the report here: EquityZen Cybersecurity Sector Report



A Shifting Landscape

Cybersecurity is poised to become a key challenge for the modern economy. A staggering 4B records were exposed to data breaches last year , including notable attacks on Yahoo (twice), Dyn and the Democratic National Committee. This number is expected to increase – Cybersecurity Ventures estimates cybercrime could cost the global economy $6T annually by 2021 , up from $3T in 2015.



As the business world is coming to understand, the old security models are broken and new tools are needed. As cyber risks grow, legacy technologies have become increasingly less effective in mitigating them. Several key changes are driving this trend:

  1. The volume of data transmitted is growing rapidly, with global IP traffic projected to reach 3.3 zettabytes (ZB) by 2021 (vs. 1.2 ZB in 2016)
  2. Data is increasingly stored outside of data centers, which traditional security systems were designed to protect
  3. Hackers are becoming more sophisticated at undermining legacy security tools.
A wave of startups are driving innovation within the sector to meet new security challenges. Key innovations introduced by these companies to address emerging cybersecurity challenges include cloud/IoT security, quantum encryption, and predictive analysis. These companies have already managed to catch the eye of many VC investors who have contributed large investments to help bring new cybersecurity tech to fruition.

Venture Investment in the Cybersecurity Space

Cybersecurity has attracted robust venture funding. 2016 marked a robust year for private security financing, with $3.5B invested in 400 start-ups . This momentum continued into 2017, with 1Q17 marking a five-year record for VC-based cybersecurity deals. Prominent venture firms invested in the space include Andreessen Horowitz, Bessemer Venture Partners, Accel Partners, Intel Capital, and Lightspeed Venture Partners.
Cybersecurity-dedicated funds are also bursting on to the scene. Earlier in 2017, Trident Capital launched a $300M cybersecurity fund. The fund—which was oversubscribed at its debut—is one of the largest dedicated exclusively to cybersecurity. Allegis Capital and TenEleven Ventures also focus on the sector. Over 1,400 cybersecurity start-ups are currently operating. Unicorns (companies valued at $1B or more) include Tanium ($3.8B), Illumio ($1B), CrowdStrike ($1B), Cylance ($1B) and Zscaler ($1B).
Cybersecurity is a large and growing market. Thrust into the public conscience now more than ever, cybersecurity startups are racing to solve one of the world's most pressing problems. To learn more about the industry, companies in the sector, and gain further analysis, remember to check out our full report here: EquityZen Cybersecurity Sector Report
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What did the Redfin IPO Mean for EquityZen Clients?

Chuk Okpalugo | August 10, 2017

Redfin (NASDAQ: RDFN), the Seattle-based tech-enabled residential real estate brokerage, completed its Initial Public Offering (IPO) on July 28, 2017. By providing investment access in the company pre-IPO in 2016, EquityZen’s platform allowed several qualified investors to achieve average returns over 3x in excess of those of public market investors who continue to hold their shares.

EquityZen’s platform makes investment available in established, growth-stage private companies 2 – 4 years before the IPO . With private companies today taking, on average, over 10 years to go public compared to four years in 1999 , much more of a company’s growth occurs in the private markets. EquityZen’s platform can provide a massive advantage to private investors over those who wait until the company’s shares are available for investment in the public market. For a more detailed analysis, read the Redfin Case Study .

Note: returns from investments in Redfin are not necessarily indicative of returns achieved on all investments on the EquityZen platform.

EquityZen Investors Mark Superior Returns

Redfin has had a strong public markets debut. As of last Friday (Aug 4th), RDFN closed at $25.84 per share after pricing the IPO at $15.00 per share. However, the earliest price available to the typical public investor was the opening price on the first day of trading, $19.56 per share (the IPO Open price). Returns on an investment at the IPO Open price would be marked at 32% at recent prices but even investing at that price is theoretical, as it requires quick execution and some luck to invest right at the open. Such is the constraint of investing solely in the public market.

EquityZen breaks this constraint by allowing investors to access opportunities in growth-stage companies backed by premier VCs before they start trading on the NYSE or NASDAQ. In Redfin’s case, EquityZen’s platform enabled several investors to invest in Redfin in late 2016 at what amounted to a dollar-weighted average price of $12.00 per share. As a result, EquityZen clients are able to mark a 115% return at recent prices of $25.84, over 3x in excess of public market investors who continue to hold their shares.

Performance of Redfin Investments Facilitated via EquityZen Platform
Source: EquityZen, Yahoo Finance

Company Buy-In is Vital

As with all deals on EquityZen, the Redfin transactions were conducted with approval from the company – this means actual shares were transferred. Since shares are transferred, rather than synthetic contracts such as derivatives, EquityZen investors can rest assured that the transactions are above-board and without counter-party risk.

EquityZen Leading Secondaries 2.0 Movement

On the principles of building a trusted, secure, and transparent solution, EquityZen has led the wave of Secondaries 2.0 . Building on top of these principles, EquityZen is proud to have conducted 2,000+ private placement transactions in 70+ pre-IPO tech companies, which are among the largest and most reputable private firms. In fact, one in three of the largest 50 unicorns (private tech companies worth over $1B) consider EquityZen a liquidity provider. EquityZen’s platform allows accredited investors unique investment access with a minimum investment of $20,000. If you are an accredited investor, you too can research investment opportunities. Get started here.

(You can determine whether you are an accredited investor by going here . If you qualify, you can join 10,000+ accredited investors from 30+ countries who can access , research , and invest in private companies on EquityZen’s investment platform.)

Related Links
Redfin Case Study
Redfin Path to IPO

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Streaming: The Savior of the Music Industry?

Chuk Okpalugo | August 03, 2017

The last two years have proven to be a huge turning point for the music industry as internet streaming has meaningfully reversed the 15-year decline in industry revenues brought about by the internet piracy age at the turn of the century. In this post, an excerpt of our industry overview report, we’ll briefly discuss the industry growth trends. For a detailed analysis of the industry’s history and the business performance of the key players, please download the report here: EquityZen Industry Overview: Music Streaming .

Source: Global Music Report 2017, IFPI

The Music Streaming Wave

Since the early 2000’s digital music has been a growing category of music consumption. The high levels of piracy and rapidly declining physical CD purchases resulted in billions of lost industry revenues. As broadband speeds increased and huge music libraries became easily accessible internet streaming became the dominant way to listen to, and a pay for, digital music. There are many platforms in the market today, forming three broad categories:
  • On-Demand, e.g. Spotify, Rdio, Deezer, and Rhapsody
  • Internet Radio, e.g. Pandora, Slacker, and 8Tracks
  • User uploaded content, e.g. Youtube, Soundcloud, and Grooveshark

The effect of the internet streaming wave has been dramatic. After almost two decades of decline, digital music sales (driven by streaming) has reversed the decline of global music industry revenues and led to two years of positive growth. Total industry revenues grew 5.9% to USD 15.7 Bn in 2016 of which digital revenues accounted for more than half. Streaming was responsible for 60% of this growth, offsetting declines of digital downloads and physical purchases and now accounting for 60% of global digital revenues.

Key Players

Spotify (on-demand) and Pandora (internet) are the leading internet streaming companies today in terms of users. Apple Music, although a newcomer, is quickly scaling to join them in the top ranks and may pose a threat to their future growth. Whilst Pandora’s active user numbers are in decline, Spotify has continued to grow, adding about 12 million new paid subscribers from January to July 2017, about 4 million greater than Apple Music over a similar period. Considering that, as an internet radio service, Pandora generates far less revenue per user, Spotify looks set to maintain its position as the clear market leader.

Source: Company Information

Looking Forward: Is Streaming the Future?

As global internet penetration, connectivity, and data analysis continues to improve, one can be somewhat confident that streaming is here to stay for at least the next 5 – 10 years, as long as the business model is sustainable, that is, as long as the music labels and independent producers see enough of the streaming revenues to encourage continued investment and development of high quality musical content.

For a more detailed analysis don’t forget to check out our report here, EquityZen Industry Overview: Music Streaming .
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Redfin: Path to IPO

Charlie Joyce | July 20, 2017

Redfin, the Seattle-based real estate brokerage aiming to reshape the industry, recently priced its upcoming IPO between $12 - $14 per share. At this valuation, Redfin would become the latest tech unicorn on the public market. As the company heads towards its public listing, one big question lingers for investors: Should Redfin be valued as a real estate brokerage or as a tech company?



Growth: Tech or traditional?

In their S-1 , Redfin highlights its growth in 81 out of 84 US markets. However, investors will be more focused on whether the company can follow the traditional growth trajectory of a technology stock, or more slowly like a traditional brokerage. Over the last two years, the company has averaged a 46% annual growth rate. By comparison, Zillow, another Real Estate tech company, grew at an average 65% annually during the same period.


(Source: Redfin S-1, Zillow Investor Relations)

The two companies were founded within a year of each other, 2004-2005, with the same mission: leverage technology to disrupt the residential real estate industry. However, by comparison, Redfin’s trajectory does not appear to follow that of typically high-growth technology companies. It is also important to note that Zillow went public in 2011, 6 years after it was founded, and reported profitability in 2011 .

Success in Seattle

Another important question for investors should be how returns will be distributed for Redfin. At IPO, one big winner will be another Seattle-native, Madrona Venture Group.  The VC firm participated in all but the most recent round of private funding, accumulating an ownership position of 11.4%.


Going forward, Redfin’s move into public markets will make it rare among residential real estate brokerages, which are traditionally structured as private partnerships. The company, which has not yet achieved profitability, claims to save consumers an average of $3,000 per transaction and offer commissions to agents which are twice as high as competing brokerages, but will need to invest over $100 million in IPO proceeds to fund additional marketing and tech development before the company can generate profit for shareholders. It is important for investors to consider how long they’ll wait before seeing returns, especially if the company decides to fund further investment.

Big bet on Real Estate

The most attractive aspect of Redfin as an investment opportunity is its massive TAM, or Total Addressable Market. In 2016, Redfin supported transactions representing $16 billion in home value, or 0.54% of its estimated TAM. This implies that Redfin is competing for an estimated $3 trillion of residential real estate within the US market alone.

Currently, the company’s revenue is highly concentrated in its “Top 10 markets” but is showing signs of spreading out its bets. With such high concentration, the company’s future becomes highly dependent on the strength of those individual markets. However, if Redfin continues to provide savings to consumers and incentives for brokers, it may be able to breakout from traditional limitations and obtain an outsized share of that $3
trillion market.
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SEC Expands Confidential Filing to All IPOs

Shriram Bhashyam | July 06, 2017

Starting July 10, 2017, all companies seeking an IPO, whether or not they qualify as emerging growth companies (“EGCs”), will be permitted to file their draft IPO registration statements confidentially. This is an important development, as it may lead to more IPOs and is a signal of tone shift at the SEC towards capital formation.

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Tech IPO “Down Rounds”: EquityZen Runs the Numbers with Jeremy Abelson and Irving Investors

Phil Haslett | May 25, 2017

The recent Cloudera IPO has re-ignited a discussion about down rounds. How could a private company possibly be valued at $30.92 per share in 2014, and then go public at $15? What could lead to such a corporate phenomenon? Do the valuation techniques of VC firms and Wall Street really differ by such a margin?

Cloudera's valuation was chopped in half between 2014 and 2017
It turns out, down rounds are increasing in regularity, based on data analyzed by EquityZen and Irving Investors , a tech-focused hedge fund managed by Jeremy Abelson. But first…
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Not So Obvious: Here's What To Know Between NSO and ISO Stock Options

Nat Disston | May 18, 2017

The world of startup stock options can be pretty opaque. To outsiders, its seems all one does is join a small company, and, if it works, everyone becomes millionaires . For new employees, they often don’t know what they don’t know and are faced with piles of new documents and more questions once they join their budding business. Core to our mission is to help educate employees, companies, and their founders about their stock options and what they can do with their resulting shares .

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