Investering i techbolag utanför börsen kräver mod

There are several ways for retail investors to trade shares of hot tech start-ups that don't trade publicly. But know the potential pitfalls before jumping in.

It’s a classic entrepreneur’s origin story: Guy encounters a knotty problem—and starts a company to fix it.

Back in 2012, Atish Davda wanted to buy an engagement ring for his fiancée but didn’t have the cash because a significant chunk of his wealth was tied up in shares of a private company. “I tried selling my private stock,” he says. “It was incredibly difficult, with hundreds of pages of legal documents.”

That headache became an epiphany, and a year later Davda founded Equity Zen, a broker-dealer connecting buyers and sellers of private-company stock—in particular, shares of hot tech start-ups, some of which are unicorns, or private companies worth more than $1 billion. Equity Zen is one of a number of such companies operating in a burgeoning market for these transactions.

If this sounds like the beginning of a great American success story, well, maybe it will be. Equity Zen, Forge (its bigger, older competitor), Nasdaq Private Market, and others are scaling up, breaking down barriers, and processing thousands of transactions. The growth of these firms stems from a transition in equity markets in which many fast-growing tech companies are staying private longer, receiving cash infusions from venture capital funds, and amassing huge valuations.

For tech investors who want to expand beyond the so-called Magnificent Seven stocks that have dominated the S&P 500 in recent years, trading platforms that buy and sell private shares have created an opportunity to invest in leading tech companies that have remained private. 

Forge has recently created the Private Magnificent 7 index (SpaceX, OpenAI, Stripe, Databricks, Fanatics, Scale AI, and Rippling), which the company says has outperformed its publicly traded relative over the past year, 74% versus 43%.

Legacy wirehouses are gearing up, too. “It’s early days,” says Michael Gaviser, head of private markets at Morgan Stanley Wealth Management. “But the dollar volume and number of trades, number of advisors who’ve been trained on the process, and number of clients who’ve engaged are all multiples of two years ago.”

Yes, it’s increasingly possible for wealthy investors to buy shares of private technology companies, and yes, financial middlemen are working feverishly to facilitate these trades. But don’t think it’s as easy to buy 1,000 shares of OpenAI as it is to buy Nvidia . Trading in private-company shares is still far from a friction-free, mature marketplace. 

Let us count the ways.

“The fundamental feature of private markets is information asymmetry,” says Tom Callahan, CEO of NPM, which was founded in 2013 as part of the Nasdaq Stock Market and spun off three years ago. “There basically are no requirements that private companies disclose financials, past history, forward-looking statements, or even their shareholder structure. You’re really flying blind. How do you make an investment decision on an asset when you know nothing about it?”

Callahan wants to mitigate those concerns. But in the meantime, can you say “caveat emptor”?

I’ll get into navigating that terrain, but first, a few notes on what’s been driving the growth of private-market investing. For one thing, marquee tech companies are going public later because they can raise plenty of money privately. Enticed by billion-dollar returns from the likes of Google, Facebook , and WhatsApp when they were private, investors have poured money into the venture capital business, which provides much of the tech sector’s pre-IPO funding. 

Over the past 15 years, VC investment in private companies has climbed from $37.3 billion funding 4,923 deals in 2008, to $170.6 billion funding 13,608 deals last year, according to the National Venture Capital Association . (The 2023 figures pale in comparison with 2021, a red-hot year for venture, when $348 billion went into 19,025 deals.)

Another impetus for staying private: Some start-up CEOs and venture capitalists look askance at public markets, considering them fraught with regulation and risk. VC potentate Marc Andreessen, for example, has lamented regulations such as Sarbanes-Oxley and Regulation Fair Disclosure, as well as what he has seen as other troublesome factors, including hedge funds, short sellers, and sometimes journalists. He’s even declared the initial public offering market to be dead. 

Hyperbole, yes, but Andreessen isn’t completely wrong about IPOs and public markets, which I wrote about last year. The number of U.S. public companies now stands at 5,515, according to the World Federation of Exchanges. That’s 423 fewer than 2023, and down 32% from a peak of 8,156 in 1997. 

Bottom line: Successful companies don’t need to, or maybe don’t want to, go public as much as in the past. That means fewer opportunities for ordinary investors—and more upside for the Marc Andreessens of the world. That is a contrast with how the tech investing ecosystem used to work.

Consider Amazon.com versus Airbnb in their first 12 years of existence. Amazon was founded in 1995 and went public two years later at a valuation of $438 million. A decade later, the company hit a peak market cap of nearly $42 billion. Airbnb , on the other hand, was founded in 2008 but didn’t go public until 2020. At that point, it had a market cap of $47 billion, meaning the sweet spot of Amazon’s growth was available to public market investors, while in the case of Airbnb, much more of it went to the crowd on Sand Hill Road—the Silicon Valley boulevard where top venture-capital firms are located. 

Yes, Amazon and Airbnb are different companies. But it’s worth noting that Amazon recently had a market cap of $2 trillion, while Airbnb is currently worth $128 billion—so, to date at least, most of Amazon’s upside has been while it was public, which hasn’t been the case for Airbnb. It demonstrates perhaps that for public sector investors, going public earlier is better.

Today, there’s a whole crop of potentially compelling private tech companies, even beyond Forge’s Private Magnificent 7. Chime, Epic Games, Kraken, Neuralink, Plaid, Ripple, and Zipline are huge in terms of valuation, growth potential, and risk. Take OpenAI, which, even with its ceaseless management drama, just raised $6.6 billion at a $157 billion valuation , giving it a slightly larger valuation than Goldman Sachs Group and in the same neighborhood as SpaceX—the most valuable tech unicorn ever. 

Speaking of unicorns, that herd is now estimated to number 568, according to Kelly Rodriques, CEO of Forge, making these beasts not as rare as unicorns—perhaps thoroughbreds or mustangs.

Generally speaking, you must be an accredited investor to buy stock of a private company. According to the SEC, that means having a “net worth over $1 million, excluding primary residence (individually or with spouse or partner), or have income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years.”

If you meet the standards, you can ask your broker to help or create an account at Forge, Equity Zen, or one of the other firms in this business: InvestX, Rainmaker , Linqto, Hiive, Equity Bee, Collective Liquidity, ClearList, MicroVentures, or Zanbato.

Here’s where things get tricky. “The public markets are bilateral,” says NPM’s Callahan. “You are the seller, I’m the buyer. The private markets are trilateral. You’re the seller, I’m the buyer, but the chief financial officer of the company needs to approve every single trade. And there really are no criteria or guidelines here.” 

Even if you have a deal to buy a slug of Anthropic stock (the hot AI start-up), companies often have a 90-day right of first refusal, or ROFR (rhymes with “loafer”), window to vet the trade. 

“It’s a mess,” says institutional trader Tiger Williams, founder and managing member of Williams Trading. “The company can buy the block back themselves or sell to some institution. The failure rate on these trades is incredibly high.” Williams notes that sometimes, unscrupulous brokers mislead buyers or sellers about having stock for sale, or use a company’s private information about shareholders to find potential new investors— as allegedly happened at Carta, which provides software to manage companies’ investor holdings and had ventured into a private-stock trading platform business, as well. 

On Forge’s and Equity Zen’s websites, you can see stock of private companies available. What’s up with that? Those are often shares available through what are known as special purpose vehicles, or SPVs, which is stock owned by these platforms and wrapped into securities. SPVs, naturally, can come with transaction fees, management fees, and even carried-interest charges of 20% on any upside. 

These platforms also have thematic SPV bundles of these securities, sort of like an exchange-traded fund. Rodriques of Forge points to the Private Shares Fund , which holds a basket of private companies and has a minimum of $2,500 and a sales load of up to 5.75%, and net annual expenses of up to 2.93%. Equity Zen has funds for artificial intelligence, blockchain, healthy living, and other themes.

Private-market brokers say these investments outperform or at least match publicly traded stocks and funds. But there are so many opaque variables—never mind cherry-picking time periods—that drawing hard and fast conclusions is difficult. As the Nobel Prize–winning economist Ronald Coase famously said, “If you torture the data long enough, it will confess to anything.” 

For instance, the Forge Private Market Index (a basket of 75 of the most liquid unicorns) rose 388% versus 136% for the Nasdaq Composite from 2019 through 2021, but from 2019 through this September, the index is up 124% versus 174% for the Nasdaq. 

Another option is to buy into a venture fund or ETF that owns private companies such as Fundrise , which has stakes in Anthropic and Databricks, or ARK Venture fund , which, according to its most recent filing, is 12.8% invested in SpaceX, 7% in Epic Games, 4.7% in Anthropic, and 4% in OpenAI. Sounds great, but the fund has returned 16.1% since inception two years ago, trailing the S&P 500’s 24.7% in that time.

Another proxy might be Forge itself, which is publicly traded—though that may be a cautionary tale, too. The company IPOed as a special purpose acquisition company, or SPAC, in 2021 at $10, and now trades for $1.31, suggesting perhaps that the story of retail investors buying private-company stocks is still being written.