Let’s say you read an article about a private company that’s growing fast and seems headed for an IPO.
Unless you happened to have been able to invest in the company while it was private, chances were good that you would not be able to own its stock until after it went public.
But if you happen to be an accredited investor — e.g., your income is greater than $200,000 or your net worth exceeds $1 million — you could have a chance to buy shares in the company earlier.
That’s the conclusion I reached after an April 23 interview with Kelly Rodriques, the CEO of San Francisco-based Forge Global, which says it offers “an entirely new and alternative way to approach financial liquidity. Forge’s tech platform connects sellers of today’s most valuable private pre-IPO unicorn stocks with investors.”
Established in 2014 as Equidate, the company “was founded by Y Combinator alumni and backed by top investors including Tim Draper, FT Partners, and Munich Re. Forge Global’s platform allows shareholders and investors in privately held innovation firms to liquidate a portion of their shares and provides private and institutional investors access to top companies like Spotify, Lyft and 23 and Me before their IPO.”
Forge — which has raised $88.5 million and according to Rodriques will employ 130 people after completing its March 2019 acquisition of custodial services provider, IRA Services — is working with Slack which is planning a direct listing.
In Slack’s last private capital round in August 2018, it raised $427 million at a valuation of $7.1 billion. Through Forge, you could purchase shares of Slack at that valuation.
But Slack thinks it’s worth more now. In February 2019, the business messaging service was talking about listing at a $10 billion valuation, according to Forbes. If that actually occurred, you would be able to sell those Slack shares on the day of the IPO and earn an attractive return on your investment.
Forge sees a large and growing market opportunity. As Rodriques said, “There are 300 private companies worth over $1 billion for a total potential market capitalization of over $1 trillion. And there are another 600 companies worth at least $500 million. While these companies have stayed private longer than companies did in the 1990s, more of them are going public.”
Forge plans to raise up to $1 billion in the next year by selling a series of structured notes linked to the shares of startups. BNP Paribas will offer these derivatives — linked to the 300 unicorns — both to institutions and wealthy individuals in Europe and Asia, according to the Wall Street Journal.
Forge makes money by “charging a transaction fee of 2% to 4% when it provides liquidity to sellers. But as the market gets bigger, the fee percentage declines. We also charge a custodial fee for holding the asset in a private securities account,” he said.
Forge is trying to provide better liquidity options for founders and people who have worked for years to get startups off the ground. As Rodriques said, “In an IPO, the only ones who can ride the first day pop are favored clients of the investment banks handling the IPO. They get shares at the IPO price and can sell after the shares rise on that first day. Through our services, insiders can sell at the IPO or before — instead of being locked up for six months.”
Forge sees itself as more scalable than the small brokerage firms it competes with who try to match up buyers and sellers for startups. As he explained, “We are scalable because we built transactional technology — called the Deal Engine — that configures the closing process and automates the digital workflow for trade settlement; we provide data used to set the price of the offering; and we will provide custodial services once our acquisition is approved by regulators.”
Forge wants to remain private for a long time. “We have tripled every year for the last five years and will do that in 2019. If we do an IPO, it won’t be fore a long time. I like the flexibility of being private compared to the scrutiny of quarterly reporting.” he said.
If you can’t convince the CEO of a hot startup to let you invest, maybe you can have better luck with Forge. As Rodriques said, “an accredited investor interested in participating in such investment opportunities can open an account with Forge or call our capital markets desk.”