Is buying and selling short positions in private companies the next step? This fintech startup is banking on it – TechCrunch

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Even the most casual observer of the industry can sometimes be stunned by the current pace of negotiations. Not quite halfway through 2021, startups regularly close new cycles a few months apart and sometimes see their valuations triple or even quadruple with each new cycle.

Maybe they will all become trillion dollar companies. It’s more likely, however, that they won’t, and that’s where one-year-old Caplight comes in. Led by Javier Avalos, a former investment banker who recently spent more than three years with the secondary platform Forge, Caplight is currently building a model that will allow institutional investors to take long and short positions in private companies through synthetic derivatives settled in cash, so whether or not they own real shares in certain startups, they can bet on their rise or fall.

Caplight isn’t the first company drawn to the idea. Another young startup in New York, Apeira Capital, is also looking for overpriced “short” startups. Additionally, Avalos and his co-founder, Justin Moore, a former director of engineering at Forge, could also face competition, from their old company, for example, as well as from the venture capital firm Carta. which manufactures software to manage participations in other startups. .

Still, Avalos thinks he’s on to something. Caplight already has $ 400 worth of interest from more than 30 institutions, he says. It also just closed on $ 1.7 million in pre-seed funding led by Fin VC, with participation from Susquehanna Private Equity Investments, Clocktower Ventures and Dash Fund. We spoke with him at the end of last week to find out more; below are excerpts from that discussion, edited slightly for length.

TC: You were at Forge, which helps people buy and sell pre-IPO stocks. What opportunity did you see while working there?

JA: I think platforms like Forge have been really successful in creating technology solutions for startup employees, for startup founders, and for companies themselves, and that’s great. What we’re really focusing on are the big institutions that need real liquidity, which means higher trading frequency, whether it’s the purchase and sale of options contracts or the conclusion of swap-type agreements. [They need a way] to quickly enter and exit positions, as well as for cover.

Caplight [aims to become the] infrastructure that allows any other fund that seeks to take directional positions in private companies. It’s supposed to be the plumbing that connects that fund to a market, but not just the market – all the infrastructure that goes with it. So, hold assets in prime brokerage; be able to quickly settle transactions through clearing houses; be able to provide [the] data to inform a placing on the market to evaluate these contracts.

TC: More precisely, what do you offer?

JA: So we [want to] allow institutional investors to hedge their private company stocks – to generate income on their private company stocks by selling out-of-the-money option contracts, for example. We also allow institutional investors to take short or long positions [and] we do all of our transactions synthetically, so the underlying stocks don’t have to budge.

TC: Are the shares of a private company used as collateral or encumbered in any way? Do you need permission from the startup?

JA: The pre-IPO stock can be used as collateral. It doesn’t always have to be. The advantage of creating a synthetic platform is that you can inject liquidity into the market by working with sellers who don’t actually own the stocks. If I’m a hedge fund and don’t own stock in a pre-IPO company, but still want to express a short interest – a negative opinion on that company – I could use Caplight to do so. I would just need to hold other marketable securities as collateral. That’s part of the beauty of what makes it a market that can have very quick settlement and execution.

TC: So if a hedge fund wants to go short, it just needs to find another party on your department that is willing to take that trade?

JA: What you need are two parts – one that is interested in missing the name and another that is interested in staying on the name for a long time. Beyond that, you need a model that helps these parties arrive not only at an agreed valuation of the business today, but also where they are comfortable entering into a contract at some point. given in the future, then to an evaluation methodology at any time. What we are talking about here is a methodology for creating market value on the value of that contract at some point between when you enter into the contract and when you finally leave. to settle the contract. These are really the three main ingredients that we need here.

TC: How do you develop this methodology? How automated is it?

JA: We’re building this now. As you can imagine, there is quite a bit of work to be done. And part of the mandate that we got for this pre-seed funding is to find the best talent to help us.

TC: Assuming that some of these inputs would include fundraising announcements, advertised income, and where things are traded in the secondary market, what are some other inputs that might surprise people?

JA: Perhaps less obvious is that when public mutual funds hold shares of private tech companies, they have to report at least quarterly that they mark those positions, and that’s all public information. So this is another alternative dataset that we would like to integrate into our platform as a product.

TC: Why does your business make sense now compared to before? Is it related to smart contracts?

JA: Smart contracts are definitely a catalyst. But I think it depends more on our position in the markets. Forge alone is [ approaching a billion dollars a quarter of volume] and this is just a platform. When you sum up all the activity, we think there is $ 20 billion in trading volume, which means pre-IPO stocks that trade every year. For a market of this size to exist without the ability to have directional bets on top of that, or hedging which is very easy, it just doesn’t make sense to us that hedging and type trading derivative do not exist.

TC: It’s a work in progress. In the meantime, what’s stopping Forge or Carta from doing what you’re doing?

JA: It’s something I spend a lot of time thinking about. It comes back to a point I mentioned earlier, which is that I think Carta and Forge have done a really good job creating technology solutions that serve businesses, and I think a lot of future growth for Carta and Forge. and some of the other players depend on their ability to develop corporate relationships. And when you have a lot of [your] growth dependent on building these relationships – much of the valuation attributed to Forge and Carta and other secondary platforms is related to their ability to maintain these relationships – to recover and support a market that Allowing institutions to be in the open on the same companies you fight with to build relationships is direct conflict.

Above, left to right, Caplight founders Javier Avalos and Justin Moore. For more on this discussion, including some of the legal hurdles Caplight faces to run their business, and how it attracts buyers and sellers to the platform, you can hear our longer conversation here.



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