EquityZen Knowledge Center

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Running with the Bulls: Private Market Sentiment Update

softbankprivate market sentimentiposcryptosbitcoinspotify ipo
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Asa Lieberman   June 21, 2018

In a constantly-evolving tech landscape that can move at an exhaustingly tireless pace, the year 2018 has already brought us ever-growing funding rounds, new financial regulatory rulings delineating what is and what is not a security, and a sudden interest in *checks notes* scooters. We've also digested headlines of trade wars and geopolitical turmoil with varying effects on the public market. But how does all of this factor into the psyche of the private market investor?

Source: EquityZen
Past performance is not indicative of future results.  It is not possible to invest directly in an index.

Luckily, there's a great resource to help answer this question: EquityZen's Market Sentiment Index (EZMSI). In this article, we'll take a dive into what the EZMSI actually is, how to read it, and what it tells us about sentiment in our current climate. Though this is just a snapshot, be sure to sign up for our platform to access the live version of the EZMSI and get real-time updates on private market sentiment!

What is the EZMSI and what does it say about the here and now?

The EquityZen Market Sentiment Index is a chart intended to measure and communicate the attitudes of market participants (that is, buyers' and sellers') towards the current state of the private market. It is important to remember that—as with public markets—market sentiment measures are not always based on fundamentals. This tool serves more so as a general barometer of the bearishness or bullishness of participants in the market. The index itself is a relative measure during a given period of time, which in this case is the last two years. In other words, the most bullish point over those 24 months will be indicated by a score of 100.0 and the most bearish point a score of 0.0.

Our most recent calculation was for the month of May 2018, which came in at 75.1, a generally bullish figure. Compare that score to just a year ago and we're at roughly 5x the bullishness of May 2017. In fact, we can see that we've experienced quite a run of bullish fervor beginning at the start of 2017, with absolute zero coming in March 2017, reaching a peak in December 2017, and then cooling ever so slightly throughout 2018. Looking over a trailing two year period allows us to view trends with greater context, providing perspective when assessing overall sentiment, rather than simply focusing on a passing run or scare.

How did we get here?

Bullish attitudes in 2017-2018 should come as no surprise to the engaged investor. Better yet, it shouldn't raise an eyebrow for anyone who has flipped on CNBC, scrolled through the Wall Street Journal, or stumbled into the questionably-entertaining void that is Finance Twitter. Why? Well, the public markets have been absolutely on fire ever since the Great Recession fully bottomed-out in 2009.


Source: Yahoo! Finance
Past performance is not indicative of future results.  It is not possible to invest directly in an index.

The chart above shows the Dow, NASDAQ, and S&P 500 index prices for the last decade. Up and to the right, as they say. The interesting piece here for the private markets is that we can potentially see two forces at work: 1) this historic public market run has been so lucrative for some that they are comfortable increasing their allocation to alternative assets associated with a larger risk appetite (such as pre-IPO, private market tech stocks), or 2) people are aware that bull runs—no matter how strong our pointed appeals to the contrary—cannot extend indefinitely, and so in advance of a market slowing or downturn, investors want to diversify their portfolios in an effort to mitigate the risk that overexposure to the public markets creates. While not a perfect correlation by any means, public market bullishness usually generates overall bullishness towards the activity of investing on the whole.

Any private market factors at work here?

In case you're just waking out of a six-month slumber, 2018 has already been crowned the "return of the IPO." Household names like Spotify, DocuSign, and Dropbox have all hit the public market to mass fanfare, driving the public discourse around private markets and scoring large returns for investors along the way. The fun doesn't stop there: well-known tech players GitHub and Glassdoor, among others, have gone the route of corporate acquisition to achieve an exit. With recent filers in Domo and Bloom Energy (not to mention Adyen's recent eye-popping IPO), 2018 shows no signs of slowing down any time soon. To find out which companies are on our exits radar for the second half of the year, check out our 2018 IPO Outlook here.

Of course, we'd be remiss not to note that companies are simply staying private longer. Particularly with the advent of megafunds like Softbank that can flood large private companies with multi-hundred million dollar funding rounds, more and more pre-IPO private companies are choosing this source as a favorable alternative to opening their operations and books to public scrutiny.

Is that the full picture?

Hmm... can't seem to think of any other relatively new investment phenomenon to have also taken place over the past 8-12 months that sits firmly at the intersection of finance, tech, and investing that might drastically emphasize, exaggerate, or sway market participant attitudes...

Source: TradingView.com
Past performance is not indicative of future results.  It is not possible to invest directly in an index.

Oh, right: crypto happened. We cannot forget nor dismiss the buzziest topic of 2018Q4. For better or worse, cryptocurrencies dominated the daily watercooler chat (and some fintech company chat rooms...), captivating us all by growing 1000%+ in a matter of months in the case of some coins, and roaring forward to a total market cap nearing $1T. Crypto-fever came to a head right around December 2017-January 2018, just the same as our index. Does this mean our EZMSI is a terrific proxy for crypto sentiment as well? No, it does not. Even though the cryptocurrency markets and the EZMSI both peaked around the same time in December 2017, they are tracking sentiment towards different asset classes, and there is no definitive correlation between the two.

However, it is reasonable to acknowledge the emergence of cryptocurrencies as a new asset class—an undeniably speculative, yet lucrative one at that. This may have been a signal to public market investors that they should diversify into other, non-traditional asset classes as well, forcing them to look outside of standard stocks and bonds. The overall idea that an international phenomenon such as crypto, something that is so wholly steeped in investing, technological disruption, and ideas of the "future," can shine a light on new investment alternatives is something that must be considered when looking at macro forces impacting private market sentiment.

Curious to learn more about our Market Sentiment Index or various other fun dives into the private markets? Check out our Blog and Knowledge Center for invaluable resources on these topics!

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SoftBank: A Blessing or a Curse for Investors?

softbankvision funduberwagsofi
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Chuk Okpalugo   January 25, 2018

Japanese telecoms giant SoftBank has undoubtedly made a huge impact on the global technology landscape with multiple $1B+ investments in industry leading private tech firms over the last few years. SoftBank continues to make bold, and public, bets on the future of technology, but whether this large influx of capital is positive for private companies and their investors in the long-run remains to be seen. In this note we discuss some of the possible effects SoftBank is having on technology markets from an investor perspective.


SoftBank and the SoftBank Vision Fund

As a multinational with a market capitalization of almost $100B, SoftBank Corp already began making headlines in the tech world over the last few years with their large investments, such as their $32B acquisition of ARM Holdings in late 2016.  Now with the SoftBank Vision Fund, a dedicated tech investment fund raised in 2017, SoftBank has even more capital to inject into leading private tech companies.

At its current level of $98B, the Vision Fund is easily the largest tech fund raised and is roughly the same size as the total amount raised by global venture capital in 2016 ($100.8B according to CB Insights). Including their fund, SoftBank has completed over 20 deals over the last 12-18 months (many in excess of $1B) in companies such as Uber, Ola, Grab, WeWork, FlipKart, Fanatics, SoFi, Slack and Lemonade. This increased volume has many effects, such as extending the exit runway and providing much needed liquidity for early investors and employees.

Market Impact

Here are a few of the possible ramifications likely to occur following the continued wave of Vision Fund investments:

Delayed Exits 

SoftBank’s investments are usually made to large late-stage companies who have been operating for a few years. For additional runway, many companies with unicorn ($1B+) valuations need to raise very large rounds and this is typically achieved through an initial public offering (IPO). By providing this capital in a way that avoids the costly and time intensive IPO process, SoftBank may be delaying what could otherwise be a public liquidity event for early investors and employees.


Additional Liquidity 

The flip-side of this, however, occurs when SoftBank invests through secondary purchases rather than just providing primary capital. Secondary purchases allow early investors and employees to achieve some liquidity for the shares way before a liquidity event such as an IPO. This can allow for diversification for employees or return of capital to limited partners for early stage VC funds, but keep in mind: the liquidity must be traded off against the discount accepted to the latest valuation. For example, SoftBank recently closed a $9.3B deal with Uber in which the majority of the deal value was the purchase of secondary shares at a $48B valuation (30% discount) compared to the $70B valuation for the primary investment. Although this valuation is potentially lower than what investors could receive in an IPO (targeted for 2019), the certainty and immediacy of the deal on the table clearly outweighed the valuation concerns as the deal was reportedly oversubscribed.

Inflated Valuations 

As with any supply/demand driven market, an influx of capital is likely to inflate valuations. In today’s bullish equity market environment of all-time highs (particularly for tech stocks), valuations are already elevated, including in the private markets. In addition, SoftBank can presumably afford to pay higher prices (i.e. accept lower returns) due to the long-term nature of their investments and the nature of their LPs.

Whilst it’s difficult to say how much additional upward pricing pressure is attributable to SoftBank, it’s reasonable to believe that an additional $100B over the next few years will drive increased asset prices. This increases the risk of potentially dilutive “down IPOs” (where the IPO valuation is lower than that of the previous round, leading to the triggering of ratchet provisions, if they exist).

Crowding Out Competing Investors 

A large late-stage investor with plenty of capital and lower valuation sensitivity sounds great for companies seeking to raise money but may not be as welcomed by other late-stage investors with higher minimum return rates. It will be increasingly difficult to compete and these firms may struggle to deploy capital.

Less Discipline 

The prospect of cheap and plentiful capital may distort incentives during fundraising. Companies that find a large supply of investors willing to invest may push for more lenient terms or raise more than is necessary to take advantage of the opportunity. For example, as reported in Term Sheet, the company behind the dog-walking app Wag was originally looking to raise $100MM in its latest round, but that amount quickly jumped to $300MM once SoftBank expressed interest. With excess cash, companies may have less pressure to be disciplined regarding cash management or pathways to profitability, leading potentially to poorer company performance.

Context Will Be Key

Though the impact of a SoftBank investment in any particular deal is dependent on greater context, investors would benefit from calculating the trade-offs of the positive (liquidity, higher valuations) and negative (delayed exits, lower scrutiny) effects. SoftBank still has over 60% of it’s Vision Fund left to deploy so it doesn’t look like these conditions will change anytime soon. Overall, deals with significant secondary considerations may be the most favorable for investors (depending on the discount) as SoftBank can provide much needed liquidity today even though the company may stay private for longer than initially expected.


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