Crossposted from my Xeet(s) on Jan 7.
The current events aren't exactly a masterclass in PR ninja moves. But public statements aside... this conflict of interest was inevitable, and has been brewing for years. If you dig deeper, there’s almost no other way for their strategy to have played out, given the corner they are painted into and the moves available to them. I thought I'd share my biased (but hopefully well-informed views) on this.
While Karri’s expectations are totally reasonable, and everyone else in the thread is correct in pointing out the conflicts of interest, Carta has to make some unreasonably aggressive moves to succeed in the secondaries space... and it might be a bet-the-company move for them.
Challenges in their core market: cap tables
Carta’s product is the market standard (despite being labyrinthine to use at times; this is because power users like law firms like it a lot); if they continued quietly cementing their presence without distraction they’d be the default even more. However, they have run into their share of unforced errors / PR issues.
That has led to openings for new players over the last ~5 years: Pulley (whose feature set has lapped Carta’s) and more recently AngelList (who is making strong inroads). Add all that to the fact that Carta’s product is the most expensive, opaquely priced… and they keep trying to raise prices (causing companies to churn).
Most importantly… the total market for (startup) cap table management is ~$500M-1B in ARR. It’s just not that big yet. It’s not like payroll, banking or credit cards… most people in the world don’t ever think about or encounter equity.
The total ARR in cap table management can probably support a total enterprise value — across all companies in the space — of $5-8B at steady state cash flows.
Carta’s last valuation was $8B. Their valuation is greater than the value of the entire market they operate in.
In other words — because 100% market share isn’t possible — the only way for Carta to grow into the valuation (let alone continue to appreciate from there) is by moving into adjacencies, in a BIG way.
So — lest you think that Carta is being reckless by endangering existing customer relationships to bet on a new product line — a better mental model is that they have to bet the company on a big adjacency.
Adjacency #1 - Venture funds
Their fund admin product has had quite a bit of traction. Some customers really like it, others don’t at all. This stems from the fact that fund admin is extremely complicated, different parts of the product are automated to mixed degrees.
For simpler funds, AngelList (who is generally much better at building product) is absolutely the best solution; OTOH, at the upper ends of the spectrum, the best solution (by far) is the established white-glove professional services firms (e.g., Standish). Carta is stuck in the awkward middle. This will be a meaningful business for them, but it’s unlikely for them to dominate the space.
Adjancency #2 - Compensation
Carta has lots of equity data, which means they can connect to an HRIS to pull salary data and inform total compensation. They’ve been making a push into this space.
This runs into different problems:
Their data architecture doesn’t do them any favors with the ability to extract insights from their equity data.
There are well-funded players in the space who are solely focused on this (Pave, etc.).
Most importantly — this is ALSO not a massive space; pure salary data is dominated by incumbents (Aon/Radford, Mercer), and the market for cash + equity comp is… maybe $100M today? Growing to $500M-1B in a decade?
I’ve spoken to hundreds of people about compensation tools (we considered building something in the space before deciding the market isn’t big enough, and is saturated); the consensus is that Carta has the best equity data, but the product isn’t all the way there and they charge too much.
Given this is an exceptionally crowded market, and not that large anyways, it’s also not going to be the driver for them.
Adjacency #3 - the Big Kahuna, secondary markets
The secondary markets are nascent but already huge. Probably generating >$5B in revenue today, and it’s still the Wild West. If it were centralized and organized, it’s $10-100B in annual revenue for the industry, easy. This is a silver bullet solution to Carta’s conundrum.
There’s a reason secondaries have featured prominently in every version of Carta’s vision for the last 7-10 years.
I’ve been planning to write a blog on “A brief history of the secondary markets” at some point, but here’s the relevant portion for the Carta Conundrum:
Companies (especially visionary CEOs and risk-averse CFOs/GCs/Boards) don’t want secondaries as a rule; if it happens, they want it to be on their terms (prices they set, buyers they pick)
Past a certain stage, shareholders want liquidity
Past a certain stage, outside investors want access
So every company goes through this arc:
Early stage, there's no market interest — no problem
Mid stage — clamp down (if there’s interest) <- Linear is here
Late stage — either facilitate regular tenders; or add process and “accept” secondaries happening. Both require a lot of admin; just depends how control-oriented the company is.
The problem is that no matter what, companies are “dragged” into doing secondaries. It’s not their preference. Which means Carta Liquidity is always at odds with their customer.
The only exception is with facilitating tender offers, but that’s actually a tiny business; it’s one-time, and a drop in the bucket compared to commission revenue. If you’re facilitating a tender with 1,000 participants for $500M, you might be able to charge $150K in SaaS to facilitate it (this is on the order of magnitude of what the leading player, Nasdaq Private Market, charges). If you broker a 10x smaller deal — $50M — the commission on that is probably $2M. "Liquidity solutions" is a 10-100x market smaller than brokering secondaries, and hence does not solve the Conundrum.
So, back to facilitating trades for commissions… here’s an anecdote.
Back in 2019 I was doing some secondary trades after leaving Forge, to pay the bills while I was getting AbstractOps off the ground. The cap table was on Carta, so I pinged a contact there and told them I had a seller. Did they have buyers for Company X? They said, “not sure, let me check with the company CFO first.”
This is what everyone is saying Carta should have done in Linear’s case.
But guess what happened when they told me that?
I replied “Uhhhh if you don’t actually have a buyer, we shouldn’t bother the company. The seller is happy to raise the question with the CEO if there’s a deal on the table, but they don’t want to annoy them or distract them before that.”
Carta stuck to their policy. I told them “don’t worry about it,” and found the seller a different buyer. Carta lost the deal.
This will happen over, and over, and over again. Carta cannot operate solely with the permission of their customers. They have to be able to at least explore trades without the company’s prior permission. The dynamics of the secondary market simply will not allow their practices otherwise.
However, the completely unforced error in this case is using confidential customer data. It’s one thing to deanonymize the data to publish statistics or improve the product. It’s another thing to use PII on the company’s cap table to reach out to sellers against the company’s express wishes.
In closing…
The reps probably had aggressive quotas (normal) and broke the rules. This sort of stuff happens at startups; it’s just that when an enterprise SaaS rep breaks the rules, it means they oversold a product and it results in churn. In this case, it results in breach of trust, confidentiality, and sometimes securities laws.
I don’t think they’re ill-intentioned or trying to breach trust; this is a classic case of “show me the incentives and I’ll show you the outcome.”
Carta needs a BIG second act; their other plays (venture fund admin, compensation) are hard to succeed in, and may not sufficiently move the needle. Secondaries are a “bet the company strategy.”
I cannot think of a way for Carta to build out Carta Liquidity without endangering their golden goose (cap table management).
Side note — I really really wish the secondary markets were a bit less broken. But, it’s maturing (and rapidly in the last ~10 years) and I’m cautiously optimistic :).
Postscript
(What I’m about to state below is on the fringes of my expertise so please take with a grain of salt.)
The public company stock register + transfer agent admin services is larger, but *extremely* entrenched. Hard to get a legacy company to rip out their investor ledger like ComputerShare, which have deep hooks into regulators like DTCC, and book entry holders like Fidelity. So it unfortunately sounds like many companies move off Carta when they go public; their testimonials certainly seldom include public companies. For Carta to make a serious play in this space, they probably need a stock trading portal for public companies, in addition to a host of new product features. Public company stock needs are very very different.
But all that said… that may be their best strategy. Rather than going up against other nimble startups (or brokers), it’s a better play IMHO to compete with dinosaurs like AST or ComputerShare — if they brought their whole focus to the problem.
Conflicts
I helped build @Forge_Global (largest secondary trading platform) as COO, oversaw ~$1B in trades; I'm still a meaningful shareholder
I’ve used every cap table management platform under the sun, hundreds of times while building @AbstractOpsCo and tried to partner with Carta; I’ve also provided them feedback numerous times (as a user seeking to improve a critical piece of infra for startups).
I'm building some things in the compensation-adjacent space at @AutographHR (not necessarily competitive to Carta but some may see it that way)
I invested in @pulley because I saw a sore need for a new, better player in cap table management (I’m a current, happy customer)
I was an advisor to @AngelList, and also invested in them; they later made a bigger move into cap table mgmt as well, and they’re a contender in the space (I’m a current, happy customer & user of multiple products)
Henry invested in AbstractOps