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How to Hedge Against Private Company Valuations

Secondary MarketShareholderInvestorInvesting Strategy

Atish Davda   January 05, 2017

"How can I hedge against private company valuations?"
"Can I short pre-IPO shares?"
"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.


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 portfolio.

In venture investments, which tend to perform on a power law,[1] 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.[2]

Portfolio 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 busted.

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?

Diversify Across Sub-Sectors

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, BitPay) has come and receded from popularity, to be replaced by the sharing economy (e.g. Lyft, Airbnb). Today, it seems virtual reality and augmented reality, known as VR/AR, are fashionable.[3]

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 of behemoths.[4]

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).[5]

Back Backers

Certain pedigreed venture capital firms have delivered impressive returns.[6] 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

Many "angel investors" limit themselves to early investments. In fact, while absolute returns are stronger from investments in break-out companies, growth equity investors (typically series C and beyond) tend to produce stronger returns.

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.[7]

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,[8] 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 venture-backed market.

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 investment.

[1] https://equityzen.com/blog/late-stage-valuations-unicorns-managing-your-portfolio/
[2] See disclaimer at end.
[3] https://www.cbinsights.com/industry-analytics
[4] Twitter’s recent criticisms aside, it is still commands a $12B market capitalization. http://finance.yahoo.com/quote/twtr
[5] http://www.coindesk.com/us-government-to-sell-44000-btc-in-final-silk-road-auction/
[6] http://www.wsj.com/articles/andreessen-horowitzs-returns-trail-venture-capital-elite-1472722381
[7] https://www.cbinsights.com/blog/billion-dollar-exit-venture-capital/
[8] http://www.feld.com/archives/2014/06/the-opportunity-growth-fund-trend.html
[9] http://www.nytimes.com/2016/04/02/business/dealbook/tech-start-ups-choose-to-stay-private-in-ipo-standoff.html

Six Months Later: The Pre-IPO Investment Opportunity in an Up Market

Secondary MarketInvestor

Kaylock Yam   September 01, 2016

Key Takeaways:

  • Pre-IPO investments can be a core part of the growth equity allocation of your portfolio in all market environments
  • Recent indicators support the case for considering adding pre-IPO investments today following the upward movement of public equity markets over the past six months

You wouldn't have predicted this six months ago.

On February 18, we published a post titled "The Pre-IPO Investing Opportunity in a Down Market." The S&P 500 and NASDAQ Composite were fresh off declines of over -7% and -11%, respectively, to start 2016. The stock prices of certain public tech companies had plummeted after poor earnings announcements. Where was a U.S. equity investor to go?


Q&A: Serengeti of Private Markets with Ben Narasin of Canvas Ventures

Secondary MarketVenture CapitalStartupsInvestor

Atish Davda   July 21, 2016

EquityZen is continuing its Q&A series with Ben Narasin of Canvas Ventures. You can catch the previous edition covering the state of private markets at the end of Q1 of this year with 500Startups’ Dave McClure. Here at EquityZen, we closely follow private markets and help shed light on opportunities available at various points of the market cycle. You can follow us on Twitter @EquityZen for more real time updates.

Ben is a seasoned entrepreneur and prolific early stage investor. He took one of his earlier ventures public in 1999, and since has focused on identifying and investing in early stage companies both, as an angel as well as an institutional investor, first with Triple Point Ventures and now as General Partner at Canvas Ventures.

Public and private equity markets in technology and digital healthcare have enjoyed a strong bull run over the past several years. However, with virtually no IPOs in the first half of 2016, they have been seemingly getting stuck in what seems like a limbo over the past six months. So, I spoke with Ben towards the end of June to discuss private markets, specifically the venture capital and growth equity kind, and asked him to help lift the fog, and share ways to find opportunities amidst the haze. A synopsis of our discussion follows.

Atish M Davda: What is going on over the past six to nine months? How has the temperature changed across the industry?
Ben Narasin: It feels like there are a lot of gray clouds of Winter in California, but the sun is still shining in New York and Europe. It is barely Fall in New York, and I’m hearing there are IPOs in Australia. Winter is not equally distributed and that is a source of opportunity.

AMD: I was just there last month, and it didn’t feel that cold. Is it really winter in Silicon Valley?
BN: Certainly, there are folks screaming “flat is the new up” and “if it isn’t perfect, it isn’t getting funded.” In some ways, it is a return to the way venture capital used to be. Good companies don’t get funded. Great companies may get funded. Phenomenal companies get funded.
“VCs make money from carry not management fees”
AMD: So the funding environment has changed for entrepreneurs. What about for the fund managers themselves? We have seen some of the biggest fund raising activity from VCs and growth equity firms in the past year.
BN: It’s certainly true that traditional managers have raced to market ahead of schedule to line up capital before people put away their checkbooks. If you assume it takes roughly three years to deploy a traditional fund, a lot of firms were going out just two years out. But, just because money was raised doesn’t mean it is available for investment. There is still plenty of dry powder from existing funds, so the newly raised capital will sit on the side lines waiting for the current fund to finish investing.

AMD: That doesn’t jive with VCs slowing down their investing activity. What gives?
BN: Well, many people think this winter will last a while. Others think things will go back to the way things were later this year. At the end of the day, VC is a long term game and VCs make money from carry, not management fees. This means that while some will remain conservative, a lot of managers will have money burning a hole in their pockets and they will begin investing again.

AMD: Given the way investment returns work in VC, will fund managers keep adding companies to their portfolio or keep investing in their current portfolio?
BN: I think you’re referring to how VC returns follow the power law, and that is reflected in how managers have made their money. If you think about a VC as a nurturing animal and their portfolio companies as cubs, most investors will save their milk, that is capital, to keep their existing children from perishing.

AMD: Do all of the cubs get milk?
BN: Not everyone’s chances are equal, but these cubs’ chances are better than those currently not part of the litter. There is a flight to quality and the process will be Darwinian. VCs may not back every company, but they’ll also get out of the way if the entrepreneur is creative and can sustain the business without additional capital or by raising outside capital. So, here’s the beauty of it: when it’s harder to fundraise, the strongest entrepreneurs become stronger.

AMD: Does this mean companies that have sound businesses will find funding even in these circumstances?
BN: Absolutely.

AMD: Those who raise capital demonstrate an even stronger signal now than in the past?

BN: Exactly right.
“[Secondary markets are] really powerful and important thing right now and will be for a while.”
AMD: With companies needing to mature more before tapping public markets, what role do you see private secondary markets play in the ecosystem? EquityZen’s platform has seen activity jump due to the rationalization in the market.
BN: Anytime liquidity can be tied with transparency, it’s great for the ecosystem. Secondary markets are going to be really important moving forward. It’s a really powerful and important thing right now and will be for a while.

AMD: We’ve talked a lot about investors; what advice do you have for existing shareholders (preferred and common holders)?
BN: This is a long-term game. Make the best long-term decision. Shareholders in private companies should remember that private companies deserve a discount, not a premium!

My kind gratitude to Ben Narasin for taking time to share his thoughts on private markets. Canvas Ventures is the classic boutique venture firm. Four partners, all stars from Morganthaler, NEA and the like. They focus on Series A and B investments.

Have questions related to venture investing? Ask in the comments below or tweet us @EquityZen.