Carta’s decision to exit the secondary share trading business was a quick response to the controversy that emerged after it was chastised by customers for using private data to foster its equity transactions.
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After a customer criticized Carta for working to connect buyers and sellers of startup shares on its secondary trading platform without permission, there have been several questions regarding data security and just what — or who — its product is. Cloudflare’s CEO and co-founder, Matthew Prince, argued in the aftermath, for example, that the only way for Carta to “justify [its] multiple [and] valuation” was to pitch investors that it was going to build “the world’s biggest secondary market” predicated on the data it holds on behalf of its customers.
No one likes to pay to be a customer, but the idea that a Carta customer’s most critical internal data, its cap table, would be used as sales fodder was anathema to at least a portion of the company’s current users. So, the company had to make a choice. And now its exit from the secondary trading business is being received quite well.
But is Carta a bad business without its secondary trading unit? Can it rely on its other revenue sources to be able to grow big enough to go public in the future?
Thankfully, Carta’s CEO, Henry Ward, shared some useful numbers in his post announcing the changes to the company’s business model:
Fast forward to today, our business is broken down as follows: the captable business is about $250M/year, fund administration is about $100M, private equity is about $20M, and the secondary trading business is about $3M. We have done a decent job at building the captable business, an ok job at fund admin (but feeling the growing pains), and an abysmal job at the secondary business.
That adds up to yearly revenue of $373 million across the business, and of that figure, Carta will presumably retain around $370 million after the pesky secondary trading unit is shut down.
Update: Carta confirmed to TechCrunch that the above figures are annual recurring revenue.
Now, that’s not to say that the secondary trading market is a bad one to operate in. Other companies are doing a fine job of offering a marketplace to trade startups shares, such as Equitybee, EquityZen and Forge Global. And there are multiple companies offering cap table software — AngelList, Ledgy and Pulley, for instance, raised Series B rounds in 2022 despite the downturn, indicating that venture investors might still be interested in the cap table side of things.
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But it seems Carta couldn’t reconcile the inherent conflict between being a trusted place to store a company’s ownership DNA and its desire to connect buyers and sellers of secondary shares. It had to choose a fork in the road, and given how its revenues are balanced between the two efforts, it is not hard to understand why Carta chose to say sorry and move on with its core business.
So, how does $370 million in annual revenue square up with Carta’s last private market valuation? Here’s the math:
Carta last raised $500 million in 2021 at a $6.9 billion pre-money, $7.4 billion post-money, valuation.With $370 million in annual revenue, the company trades at a 20x revenue multiple today.Per Clouded Judgement, public-market SaaS companies that are growing at 30% or more per year have a median forward revenue multiple of about 14x today.So, without its secondary-trading business, Carta is not that far from being a company with a revenue multiple ready for the public market, provided it’s growing at 30%.
Forbes reports that the company had revenue of $272 million in 2022, which would make for an about 37% increase in revenue to the $370 million figure we have today. (Update: Carta confirmed Forbes’ reported figure for its 2022 revenue.) So, Carta does seem to be growing quickly enough to earn a pretty good revenue multiple.
Carta really doesn’t need its secondary business to grow into its valuation if it can keep scaling its other efforts. The question today is whether or not the secondary trading mess has eroded its customers’ trust enough to seriously harm its growth prospects. If so, the company may have shot itself in the other foot, too.
