How to Hedge Against Private Company Valuations
Atish Davda | January 05, 2017
"How can I
hedge against private company valuations?"
"Can I short
"How do I lock my
shares’ current price?"
I often get variations of these questions. The answer is "no" – but, I usually point out other ways to enhance the private market portfolio. I thought EquityZen’s client base might find them interesting, so below are some ideas. If you have ideas on the matter, please send them my way via a comment or email.
Before we dive in, the ‘needless to say’ must be said: this post should not be construed as advice of any manner, and investors seeking advice should consult their financial, tax, and other advisors. Investments made through EquityZen are investments made in a pooled investment fund which acquires shares in specific pre-IPO companies. As with investments generally, there is a risk of loss; for instance, there is no guarantee that a pre-IPO company in an EquityZen fund will conduct an IPO or lead to a profitable exit for investors. Past performance is not predictive of future returns.
If you have a bearish outlook on a public company’s stock, you can usually short sell shares in that company. While short selling, or shorting, is a risky strategy, it can be a valuable tool to enhance portfolio returns if your negative outlook on the company turns out to be a good bet.
In private markets, you cannot short sell shares. But, that doesn’t mean you cannot optimize your portfolio in other ways. Below are a few ideas you might consider.
IRR, Not ROI
I hear investors bragging about multiples, or return on
investment (ROI), they achieved with certain exits (EquityZen is guilty of
calculating these multiples as well, by way of our Path to IPO series
). As an
investor managing your portfolio, set aside chasing the multiples and focus on
portfolio optimization. Remember, while some investors have a phenomenal track
record of winners, most people usually simply brag about outliers in their
In venture investments, which tend to perform on a power
law, it might be better to optimize for internal rate of return (IRR) rather than
ROI. Put another way, if possible, it
makes sense to sell a portion of holdings in a given name to lock in return
. These shareholders can then consider diversifying with new investments, including, if
they qualify, EquityZen’s own investment opportunities.
Rebalancing is In
There is a misconception that selling any private stock at
all is equivalent to a loss of confidence in the investment. Consider that myth
Even for those who question all seller motives, there is
a difference between seller motives based on circumstances: consider a 20-year
veteran executive at a public firm selling their stake and an early employee seeking
liquidity to pay off student loans.
After all, could you imagine if you couldn't rebalance
your portfolio in public markets for a decade?
The early-stage VC industry invests in sub-sector trends, which change from time to time. Just to highlight some examples: a decade ago, the social media (e.g. Facebook, Twitter) trend was followed by daily deals (e.g. Groupon, LivingSocial). More recently, bitcoin (e.g. Coinbase
) has come and receded
from popularity, to be replaced by the sharing economy (e.g. Lyft
). Today, it seems
virtual reality and augmented reality, known as VR/AR, are fashionable.
Some of these seed stage companies may graduate to become
late-stage private or even public companies over time. While the daily deals
sector rose and collapsed, the social media sub-sector still has its fair share
Spreading investments across sectors in which you have
conviction can help diversify your portfolio against idiosyncratic risk (e.g.
when bitcoin collapsed following Silk Road seizures).
Certain pedigreed venture capital firms have delivered impressive returns. These VCs attract entrepreneurs who want to be affiliated with a strong VC brand, and therefore have access to greater deal flow. While past performance is never an indication of future returns, in the VC industry, it is a little more auto-correlated than with public market investors.
Invest in Value
We have seen early-mid stage VCs raise growth funds in
the past few years, not only to capitalize on follow on investments, but also
to balance out their portfolio.
Some Other Posts We Have Written that May Be of Value
With much discussion of sky-high late stage valuations
and a dry well of IPOs in 2015-2016,
our Knowledge Center
hosts a section of insightful articles under Bubble Talk
Please help yourself as you think of ways to manage your portfolio in the
Please share your thoughts on the matter below via a
comment or contact me
Disclaimer: This article is not investment or tax advice,
please consult your investment or tax advisor. Investments made through the
EquityZen platform are investments into pooled investment vehicles, which then
acquire shares in specific pre-IPO companies. Investments through EquityZen are
speculative, illiquid, and carry a high degree of risk, including total loss of
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