Rohit Kulkarni 00:005
Okay. We are going to go ahead and get started. Happy Friday morning everyone on the west coast, and good afternoon to everyone joining us from the east coast. My name is Rohit Kulkarni. I am the Managing Director of the Private Research Group at SharesPost. And I’m really excited to co-host this webinar with our founder and CEO Greg Brogger. On behalf of everyone at SharesPost, we would like to welcome you to today’s webinar. In today’s presentation, Greg and I, we are going to tag team and run through this presentation discussing the launch and implications of the brand new SharesPost Private Growth Index. The presentation should go about 25 minutes, and there will be a Q&A session to follow. If you have a question, please type it in the questions box, which should be located on the right-hand side of your screen. You can type questions throughout the presentation and our marketing team will pool the questions for us. So now, without further ado, I’d like to turn it over to you, Greg. Thank you for joining us.
Greg Brogger 01:10
Thank you, Rohit. I appreciate it. And I think perhaps the best thing we can do to start this webinar is provide just a minute or two of background on SharesPost for our listeners who are newer to the platform. And let me just start by saying SharesPost is a transactional, and data, and research platform focused on the-- but previously was called late stage venture but I think is increasingly recognized as it’s own asset class, and what we are calling private growth equity. And the mission of SharesPost is to make that asset class investable, and the way that we are doing that is providing investors with access information analysis and data about the companies and the investment opportunities in that asset class. And in that role, obviously, we are matching buyers and sellers in transactions. And then, on the supply side, we see a number of shareholders of these leading growth companies, institutions, issuers, executives, and employees. And on the buy side, on the demand side, we are seeing family offices and high network individuals and more and more active institutional interest on the platform.
With that, maybe I would take us to the next slide. So the history of SharesPost begins in 2009 with our founding. And primarily, we were known as a place to buy and sell shares of Facebook, but that was the very early innings of this market, and what we realized is that no matter how large or exciting a company Facebook was, it was not in and of itself a marketplace. So we took a fairly patient approach to building our platform with the thought that though the trend of private companies staying private longer had been somewhat clearly established, it was going to take some amount of time until there was a robust enough, deep enough capital market that it needed the kind of infrastructure that we were building. And so you see the timeline here as we build our broker-dealer in 2011, we become a registered investment adviser and 2012, we launch the first and only mutual fund to address the asset class and provide all kinds of investors, even unaccredited retail type of investors, with access to a low-cost diversified mutual fund product. And we continued to scale the platform over the last two or three years crossing various volume milestones and including, and most recently, launching the research effort of which Rohit is the head in 2016.
And maybe go to the next slide. So one of the questions that we frequently get as people are assessing the SharesPost platform is just what kind of scale have you reached, how many issuers, etc. And so here you see the small handful or the small subset of the issuers that we have worked with and transacted in. It’s now well over 150 leading light stage companies. North $2 billion worth in total transaction volume. So with that, Rohit, why don’t we start to talk about the research effort and kind of focus more on the private growth index and how you and your team have built it leveraging the transaction and other data generated by the SharesPost platform?
Greg, I’m sorry, break for the introduction. Quick the history of SharesPost research, launched in Q3, Q4 last year. All these research reports, our white papers, and a series of other products that we have launched over the last 9 to 12 months are [inaudible] investors registered on our platform and you could get small snippets on the link at the bottom of the slide. In particular, over the last five months, we have launched company-specific, really meaty, deep-type reports. Uber, Airbnb, Pinterest, are the ones that we have done so far, and many more to come. And just as this webinar, we do host “export speakers” on the SharesPost research platform, and these are just a few of the webinars we have done, and continue to keep close tabs on the market and the big picture trends happening, particularly the IPOs and MNAs, the uptick in those that have happened over the last six months. At SharesPost Research, we try to keep close tabs on those. We decided that given the trends, what we have seen in the last five, six, seven years, in the product [inaudible] growth asset class, we thought there would be a very critical need, an objective, independent measure of the market, particularly given the marketable paradigm shift that we have seen over the last six, seven years. This is the agenda for today. I will go through these and Greg will chime in as I progress through the slides over the next 10, 15 minutes. In case any questions come in, let us know.
Maybe jump in, maybe at the slide before, if we could just-- it would be useful to explain again or go a little deeper on why we decided to launch the SharesPost Private Index. And I think it’s-- since our asset class has been characterized by a lack of information, particularly pricing valuation and transaction information, we focus a great deal of our research effort on providing that insight to the market. But previously, there just hasn’t been enough data for us to supply the market or to form that Index. And I think it’s only in the last six months to a year or so that we began to think that there was a deep enough level of transaction data to actually support an index that would be useful. And one of the real values to be indexed, I think, is that would-- by comparison, there’s so little information in our market when the companies in the asset class or the venture capital investors would look for a sense of where the market was heading and what the valuation trends would be, that the best that was available were really very anecdotal commentary about-- it may be a tech crunch blog about where valuation seemed to be going over the last couple of valuations. So I think what Rohit and his team have done is really quite an accomplishment to create a data-rich, reliable, systematic, disciplined, reoccurring benchmark, that the ecosystem can look to.
Okay. Great. As just as backdrop, just to draw on that point that Greg was mentioning in terms of what has happened to VC ecosystem over the last six, seven years, that we feel very strongly that an objective and independent measure is critical. First and foremost, in terms of a demand for private capital, every year, we have seen that grow and, every year, the largest check sizes continue to grow as well. More than $250 billion invested in the last six, seven years. And every year we are seeing that grow as well. In terms of supply of money, which is a key leading indicator for what shape of things to come over the next six, seven years, each VC fund tends to have a life of over 10 years and a fund that was raised in the last couple of years is probably going to have an impact over the next six, seven, eight years as such.
And, Rohit, I think it’s important or useful just to point out the predictability of this asset class when you look at that capital. Right? So the nature of these venture-backed companies is they proceed from their Series A to their Series B to their Series C, I think, make it more than most asset classes, we can get a sense of how large the asset class will become by virtue of the capital that has been dedicated to it, which I realize is just another way of saying the same thing that you did but it’s an interesting aspect to venture-backed companies.
Yeah. Exactly. And again, these too kind of change in the supply and demand curves of private capital along with the recent uptick in billion dollar acquisitions on IPOs, those provide a [inaudible] conviction that we are in the middle of a longer-term fundamental change in the way in which growth capital is raised, managed, and harvested, and hence, we do believe that the way we are seeing the number of unicorns being born or minted is probably not something that is not a one-time phenomenon but something that we are experiencing in the long-term trend. So that’s the backdrop and [crosstalk]--
Before we leave that slide, if we could go back just one slide. Can we go back one slide? Yeah, one of the things that sometimes-- no? Please. To the slide we just had-- that one, yes. Sometimes it’s missed about this slide, what this is showing is, of the unicorns in the market today, this is their year of incorporation. So, sometimes if people look at this quickly, they think that there’s a decline in the number of unicorns and that’s really not at all the case. I think what you’re saying is, if you look at 2014, ’15 and ’16, those relatively few unicorns that were founded on that date and that’s just because they hadn’t been given time to grow into that billion-dollar-plus market cap. But since the average time to become a unicorn, Rohit, I think, in your research you published, was about six years, we know that in six years from 2014, so 2020, we can expect to see a great many more unicorns coming out of that class. What you’re seeing here on the far right side of the chart are just those unicorns that grew far more rapidly than on average into that billion dollar valuation.
Okay. So this is why we think that there is a greater need for an objective indicator. So what is the SharesPost Private Growth Index? It is essentially an index that is designed to measure the valuation levels of US-based private growth companies. So the way we have selected the companies and their index, they are at present a pretty broad sector but the underlying tone is technology enabled index. We have in the white paper as well as on our website, we have listed all the eligibility criteria, how we calculate the index, and the way these constituents in this index starting Jan. 1st this year. Just to give you a quick overview of what we decided was we want to look at those companies that have raised at least one round of $100 million in equity capital as a private company. Why is that? If you look back over the last five, six, seven years, the median size of a VC-backed tech company’s IPO is $100 million. But in the last seven or eight years, we have seen so many private tech companies that have raised at least one round of $100 million. That makes us feel that those are the companies that could’ve gone public but have chosen to stay private, and hence, those are the ones that are most important from this asset class is concerned. This is a index that is going to be equal weighted, I will go through it, how we do the calculations. But those are the key highlights I would like for people to think about as we progress through the slide tech. Anything that you would want to highlight, Greg?
Yeah. I guess I would just add that your focus in creating as algorithmically driven an index, meaning removing as much discretion as possible from the index, I think, is important to its integrity and the reliability of it go forward. And as you said, I think that the eligibility criteria have all been selected with an eye to defining that transition point between what used to be thought of as late stage venture and what really is now a new asset class, private growth equity company. That, as you point out, would have in prior eras already be public but have decided to stay private during their [inaudible] we’re focusing our efforts. And that’s where the index is focused.
Okay. So the next set of data questions we get are always [inaudible]. I believe we’re getting a little bit of [inaudible]. Give me one second to fix the microphones.
Okay. I’m back. [inaudible]. The source of data for the calculations, that’s big buckets of data that are publicly available, as well as we added a layer proprietary algorithms, as well as waterfall models. First and foremost, starting from the bottom of this slide, our primary funding rounds. These are the funding rounds that private companies do every 12 to 18 months. So we get access to their certificates of incorporation from filings at state and we create proprietary waterfall models which are essentially representations of the various firms’ classes, liquidation preferences, share prices, and estimations of number of shares that are outstanding for every series of preferred shares in a specific company’s cap table and we create these waterfall models based on primary funding rounds. The second and equally important source of data is our proprietary secondary transactions. We believe SharesPosth has probably one of the largest treasure trove of historical as well as current secondary transactions being the leader in private tech growth market as such. And every month, every week, we keep track of where certain transactions are happening and they become inputs ito getting a clear buzz of what private tech valuations are trending towards. And the last are the mutual fund holdings. At the top, essentially these are the [inaudible], Morgan Stanleys, and the Wellington’s, and a host of mutual funds. We currently on SharesPost track over 80, age zero mutual funds. And those are the funds that hold shares in over 60 companies that are included in this index. And on a quarterly basis, albeit on a detailed manner, these mutual funds provide data points with regards to what their estimated valuation is of what a whole bunch of private tech growth companies, and we combine all these into our proprietary waterfall models and out comes the index value. It is a mathematical formula and it is a reputable and [inaudible] mathematical formula.
Again, as I mentioned, this is an equal weighted index, and by that what I mean is, any company large or small has a similar weight so the caveat there that comes out is fluctuations in small cap companies tend to have a slightly greater in terms of volatility on the effect on the index. But we believe that’s the right approach because what we want to do is a price return based index calculation. Also, in terms of what happens, how we end up calculating what happens when a company gets acquired, what happens when a company goes public or goes bankrupt or there’s a divestiture and such, those are very key liquidity events for companies in the index. The way that index is calculated, we do not have a dividend distribution. Obviously, these are private tech growth companies. But the way we have calculated or incorporated these events is by having a distribution line which will be relieved along with every index. Again, this line is just to ensure that introduction of a new company or removal of a company from the index due to any corporate action does not disproportionately affect the existing ratings of the index. Again, I won’t go into the detailed math here but what I wanted to quickly highlight is, say, Company B was acquired at a 45% premium during March of 2016, then how that affects the downstream index calculation. Similarly, if Company D was introduced into the index, how does that get introduced so that it does not affect the existing rage ages of the index? These are just internal calculations that we thought would be useful for people to understand. On the flip side, if a company filed for bankruptcy and Company B was acquired for a really big discount of [inaudible] value, that also is taken into account and we continue to adjust the ratings of the index so that they are disproportionate.
I am happy to provide more details on how we go about doing this, but the simple headline here is, it is a mathematical, recurring, and algorithmic calculation that we have automated at SharesPost Research. Just going back, another proof point in terms of the growth of the private tech growth asset class which we have talked about over the last 6 to 12 months, is just the sheer number of companies that “became eligible” to be included in the index, as in these are the companies that, as I mentioned earlier, raised at least one round of $100 million or cumulatively raised more than $200 million. The median market cap of these companies has hovered around a billion dollars to a billion five, and that’s the range of the median market cap of the companies. The cumulative market cap of the companies in the index today, there are 87 of those and it is approaching $300 billion. It is higher than $300 billion as of March 31st. What this chart shows is approximately $293 billion dollars as of Jan. 1st. So that’s how we go about doing the index, what is included in the index. All these details are also on the website as well as in the white paper. The purpose of this webinar was just to introduce you and provide a greater context.
In terms of the reserves for the index, as I mentioned, we [inaudible] tested the index as well as provided research going back to 2015. This shows the headline. The key takeaway is that, on a cumulative basis, our index if we [batch?] tested starting Jan. 1st, 2015, would have been up almost 75%. This increase is comparable to S&P final, all those 27 months is up 15%, whereas, the DOW Jones US tech index is up about 30%. Again, as we progress through on an annual basis during 2015, there was significant outperformance versus public market indices, and that outperformance has kind of reversed [inaudible] over the last 15 months, particularly during 2016, maybe five to six points in underperformance, and that underperformance has somewhat continued to lag. The performance has continued to lag the broader public markets on a year to date basis as well. About 2% growth as of March 31st, 2017 as compared to public market setting new record highs over the last three to six months. What we would also do is we would, on a going forward basis, provide [inaudible] signs in terms of what we are seeing in the current quarter, and that is what we currently do, refresh on an ongoing basis.
In terms of what to expect next, we follow the 90-day release delay schedule. By that, what we mean is the index was released in the first week of July, which included data through end of March as well as quarterly data through end of May. We will follow that similar pattern, given the delay of the data that we are able to capture, be it mutual fund data points, or in some cases, [planned leave of?] funding grounds that are reported as much as 30, 60, 90-day delayed. In the future, given the data that we have, we expect to launch more sector indices. We expect to provide more retirement tools to investors our platform, be it market cap slicing of data or the executive slicing of data, which, again, as Greg’s initial comment about what we wanted to do at SharesPost, is to provide transparency, to provide data into an investment opportunities. And these are all the steps we hope to take over the next 6 to 12 months. And we are very much open to any and all ideas and inputs as everybody on this call and other people on the platform start to play around with the data that we have out there.
Okay. Those were the prepared remarks that we had. Greg, any more that you wanted to add while I hold for questions?
No, I think that you covered it well, and I think it is-- what I would add is, in addition to the extensions to this kind of the flagship index here, cross sectors and even across--
Is there a product that can provide investors access to the index? So today, the index is freely available and it is freely available to almost everybody. And as we get into more frequent updates, as we get into more granular indices, we hope to launch separate products in the future. Second question, is it normal for an index to have constituents equal rated? Again, this is index, we decided as a first step to launch was to keep it simple, and given the wide range in market caps that we have in the index. As I said, the median market cap is 1.5 billion, and which means the [dumb?] maths is half the companies are below, half the companies are above, and of course, everybody knows the large three or four companies that probably make [80%?] of the market cap. So for simplicity purposes and as a real strength of all private tech growth companies, we decided to keep it equal rated. For example, even on the public markets, unfortunately, we are seeing that almost, I believe, 45% of all the growth that we have seen in S&P 500, is coming from five companies this year. This may come as a surprise but this is true. And just five tech companies accounting for 45% of the growth to record highs on a year-to-rate basis. So we think that’s, to some degree, not a representative of the entire economy as such. [I degress?].
The next question we have is, can you share the list of 87 companies? Yes. We do have the entire list of all the companies including the index on our website. It’s on sharespost.com/private-growth-index, and you will find the list of all the 87 companies that are currently included in the index. We will update the list on an ongoing basis and as and when we see companies being acquired, going public, or being newly eligible are to be included in the index.
We are getting a series of questions, but-- what other methods of investments would be available for the index? So I just wanted to clarify that the index is for illustration purposes only and we do not have an underlying product where you could buy the index. So this index is a benchmark in a way that we are hoping to grow [inaudible] trend mining of the valuations of private tech growth companies. So the short answer is, no, you cannot buy the index. This is something which we use internally as well as people, investors, use externally as benchmark of how valuations in the private tech growth companies have trended. The next question I see is, how are you updating the health of individual private companies related to your rating? If I know this question correctly, we track data of private tech growth companies on a daily basis. Be it any new funding ground, be it a new secondary transactions that are happening on the platform as well as on a end of the month or end of a quarter basis, we track mutual fund data, which is available to all the investors on our platform and which we also use as inputs to this index. So again, it happens on an ongoing basis. Some data comes in on a delayed fashion, which is one of the reasons why we have decided to announce the index values on a 90-day delay.
Another question we see is, do companies drop out of the index if there hasn’t been a new valuation data point? That’s a very good question. No, they do not. Again, we try to be as comprehensive in gathering all the valuation inputs for a specific company but that’s also one of the reasons why the number of companies tend to have-- the number of companies that we have in the index tends to minimize the effect of lack of data points in one specific company as such.
Okay. We are getting a whole bunch of questions but I want to be careful of everybody’s time on the call. We are well past 10:30, and in case anybody needs any more information, that’s my contact information on the screen and we will wrap it up. I guess I would also say, Greg, thank you very much for your time today and thank you to everyone for joining in. Many of you have requested access to the webinar presentation. We will be sending a follow up email with a link to the presentation within a few days as well as we will have recording for the webinar available in case you want to share it with any of your colleagues. So with that, we’ll wrap it up. Thank you very much for joining us today. I hope everyone has a very good weekend ahead. But in the Bay Area, it’s not going to be as warm as it was last weekend. So thank you and I’ll see you soon.
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