EquityZen's Blog On Startups and Their Economics

EquityZen's 2018 IPO Outlook

Catherine Klinchuch | December 07, 2017

2018 – More of the Same?

The past year capped yet another relatively subdued year for tech IPOs, with activity still well below 2013/2014 levels despite favorable market conditions. In our view, the underlying reasons for the ongoing public offering torpor remain consistent with prior years: an abundance of capital (and high valuations) in private markets, the high costs of becoming—and remaining—a public company, analyst scrutiny, and an increase in liquidity alternatives. We believe these factors may continue to weigh on IPO volume in the year ahead.

Number of Venture Backed IPOs Since 2013
Source: Company data, EquityZen estimates

Nevertheless, we believe 2018 could shape up to at least match 2017’s IPO pace (market conditions permitting), with a little over 20 startups ready to join the public ranks. Our projection is based on a bottom-up analysis, starting with a list of over 200 of the largest VC-backed companies. We then use a combination of quantitative and qualitative factors that have historically presaged an S-1 filing to determine IPO readiness.

The Profile of a Successful Tech IPO

History can serve as a valuable guide for determining which companies are primed for public debuts. We crunched the numbers on over 100 venture-backed companies that have completed an IPO since 2013 to gauge what the “average” tech IPO looks like. Our data set excludes biotech, life sciences, companies with a market capitalization below $50 million (many of which are shell companies for which sufficient data is not available) as well as Alibaba’s monstrous $21.8 billion IPO, which skews results meaningfully. Based on our results, we believe the following characteristics are useful guideposts for evaluating IPO prospects:

Age. At the time of IPO, the average venture-backed company from our data set has been private for approximately 11 years. With few exceptions, we consider 7-8 years as the minimum acceptable operating tenure for IPO candidates.

Most Recent Round of Funding. At our average company's IPO, their most recent round of private fundraising was $106 million. Returns to investors are increasingly coming from the private market, as investors who gain access to these companies even in the final round of fundraising stand to see very solid gains. We note that the total return for investors in the last private round to the IPO price was – on average – an outsized 180%.

Valuation and Revenue. The average size of the public offering was approximately $207 million, translating to an equity market cap of $1.45 billion at the opening bell (formerly private shareholders were diluted by about a fifth, on average). Annual revenues average $267 million in our dataset; we believe revenues should exceed $100 million at the very least to make a public offering viable.

Less Quantitative Factors. While not explicitly measured by our data set, we believe the following factors can also be important for IPO readiness:

  • C-Suite Experience: Companies that successfully complete IPOs tend to have c-suite executives experienced in the offering process, particularly in the CFO seat.
  • Industry sentiment: IPO windows are heavily dependent on investor sentiment on a particular sector. Companies may delay an IPO if negative industry sentiment would weigh on valuation (and thus offering proceeds).
  • Corporate culture: Public market investors are unlikely to feel confident investing in companies dealing with loss of management confidence, key employee exodus or regulatory investigations.

And The Nominees Are…

With the above criteria in mind, we list startups we view as S-1 ready below. While we have listed three companies here, please check out our report on the full listing of all 22 companies on our radar. Note that all valuations below are as of the company’s last funding round.


- Year Founded: 2003
- Industry / Description: Software / cloud-based electronic signature platform
- Most Recent Equity Funding: $310M Series F (2015)
- Total Implied Valuation: $3.5B
- Revenue Estimate: $100M+
- Other Notes: Docusign’s CEO recently signaled his expectation to go public by early 2018. The company indicated it reached cash flow breakeven in 2017.


- Year Founded: 2007
- Industry / Description: Logistics / Ride-hailing service
- Most Recent Equity Funding: $1.5B (2017)
- Total Implied Valuation: $11.5B
- Revenue Estimate: $700M in 2016
- Other Notes:  The company reportedly engaged underwriters in October for a potential offering.


- Year Founded: 2008
- Industry / Description: Hospitality / marketplace for travel accommodations
- Most Recent Equity Funding: $1B Series F (2017)
- Total Implied Valuation: $31B
- Revenue Estimate: $4B
- Other Notes: The company hired Laurence Tosi as CFO in 2015. Tosi has strong public markets experience, previously having served as CFO of the Blackstone Group.

Thank You From EquityZen

Ketan Bhalla | November 23, 2017

As we celebrate the Thanksgiving holiday in the United States, we wanted to continue our annual EquityZen tradition and reflect on a few things that we are thankful for this year.  Thanksgiving snuck up on a lot of us this year and it's hard to believe that 2017 is quickly coming to a close.


Silicon Valley Unites to Preserve Equity Compensation

Shriram Bhashyam | November 16, 2017

It was fast and furious, but in the end the US Senate ultimately came around. The Senate's version of the tax bill to implement sweeping changes and cuts to the tax code, the Tax Cuts and Jobs Act, included a provision that would have taxed stock options and restricted stock units (or RSUs) upon vesting. This would have been disastrous for the startup community, which relies heavily on equity awards to compensate employees. The startup community quickly rallied to inundate local Senators with opposition to this provision, and late Tuesday night, November 14, 2017, the Senate relented and struck that provision. We break down why this matters and how it was resolved.

Original Proposal and Why It Was Dangerous

As has been widely reported, the Trump Administration and Congress have been working on tax reform. The Senate's version of the tax bill sought to tax stock options and RSUs upon vesting. Currently, options are taxed upon exercise and RSUs are taxed when the underlying shares are released (for background on equity compensation, see this post ). Typically, options vest over four years, with a one year cliff followed by a monthly vest over the remaining three years. By bringing forward the taxable event to vesting, employees would owe taxes on shares they don't even own yet! For options, startup employees would be hit with big tax bills every year, even before the options were exercised and whether or not the employee actually sold the shares to get cash. There would be a similar result for RSUs, where taxes would be due before employees actually got the shares, let alone sell them to get cash.

This perverse outcome would create terrible economic consequences for employees, undermining the lucrative potential of startup equity. In fact, this could have been a fatal blow to equity compensation at startups.

Silicon Valley Unites

Led by Engine and the NVCA, as well as a groundswell of activity by various stakeholders in the startup ecosystem, Silicon Valley rallied to defeat this provision. EquityZen proudly supported the effort by signing on to Engine's letter, which was joined by more than 600 companies. You can read the full letter to Senator Hatch here .
Not only did the Senate strike the offending provision, it put in a new provision that actually helps startup employees deal with tax issues. The current Senate markup includes a provision that would allow startup employees to defer, for up to five years, income associated with the exercise of options if the shares are not readily tradable on an established securities market, as recognized by the Treasury Department (hey, we know someone working on a liquid market for shares like these!).
This was a nice swing! In fact, EquityZen has been supporting efforts in Congress to move the needle even further. We'd like to see the taxable event not at the time of exercise but at the time of sale, when a selling shareholder gets real income (the kind you can spend) on the sale of shares and would have the money to pay the taxes owed.

* * * * *
When the startup community unites, we can have a real and meaningful impact on the laws that govern how we live and work. We are excited to stay vigilant and fight for what's important for our little corner of the world.


Artificial Intelligence Startups: The Key to Real Returns in the Modern Economy?

Catherine Klinchuch | November 09, 2017

It appears that Artificial Intelligence may finally be ready for takeoff! In our view, AI will be pervasive in the modern economy and we believe investors will benefit from gaining exposure to this theme. Historically, technological revolutions have been triggered by a vital economic input becoming cheaper. Ultimately, AI does just that. AI reduces the cost of prediction, a key input for business decisions across many economic sectors. Given AI’s broad applicability, the potential impact of the technology is staggering, with two prominent consultancy firms pegging the eventual economic contribution at ~$14-16T . For a detailed analysis of the industry and the major players in this sector, please download the report here: EquityZen Artificial Intelligence Sector Report


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:


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.

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

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

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


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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