$1 Trillion in Equity — How Carta Is Set to Unlock the Private Markets

Tribe Capital’s April 2020 thesis on Carta — the cap-table system of record as the wedge into a trillion dollars of illiquid private equity, and why that makes it an N-of-1 rather than a TAM story.

Notes

• ==Notes==
  • Our frameworks led us to fund Slack and other category defining companies in the early stages of product-market fit. We have developed concepts such as “Atomic Units” and “N-of-1” to describe core ideas that aid us as partners for founders seeking to create big impactful companies.
  • The phrase “N-of-1” has multiple meanings for us. It refers to companies or products that are capable of becoming much larger than what people expect early on. Their level of product-market fit is so strong that it carries the business through successive orders of magnitude of scale in ways that would have been unthinkable when they were getting started.
  • [The] example [of Uber expanding their TAM] emphasizes how thinking about the status quo misses the point and fails to capture how N-of-1 companies terraform new markets and possibilities. Recognizing what is possible and why those possibilities orient around the N-of-1 company is key to understanding the opportunity before it is too late.
  • The adage “past performance is not indicative of future results” couldn’t be more true in these cases. These companies break pre-existing frameworks for determining what success could look like in their respective sectors. By definition, they are difficult to understand and harder still to identify.
  • **Emergence of a new **Atomic Units **of value **— Every era has a raw “resource” (oil, idle cars/gig workers, friend graph, etc.) that when captured, catalyzes an immense wave of innovation within a sector. These are obvious and highly contested in hindsight but are largely non-obvious to incumbents at the time of discovery. Commentators often dismiss the initial market as “too small”. N-of-1 companies recognize this reorientation early and effectively build technology products that take advantage of external macro trends to capture an early foothold in acquiring the newly discovered unit of value.
    • ==Because those units haven’t existed before it is very difficult to size that market==
  • With dominance and control of the atomic unit, N-of-1 companies are able to rapidly extend their family of products. **Once these companies create scarcity of the atomic unit, adjacent economic activity refactors around the companies **leading to broader market disruption. An ecosystem starts to emerge because other companies of different types start to rely on each N-of-1 company for their own survival. ==The N-of-1 companies become immovable central fixtures — utilities. In doing so, N-of-1 companies transform from merely services to central utilities that power entire ecosystems==.
  • Example: Facebook. Today, economic activity has concentrated around Facebook to such a high degree that it is taken as a given that Facebook effectively excises “tax” on a large swath of companies that depend on the platform to survive and succeed.** **As such they have transitioned from merely a social network to a true utility around which orbits a vast amount of economic activity.
    • Build around the Atomic Units of the social graph
  • **The insight is simple. Carta’s cap table and 409a businesses were merely a wedge to get at something larger. **What they were really doing was accumulating the underlying atomic unit by becoming the Systems of Record for asset ownership. The dominance of that system-of-record would enable Carta’s entry into a much wider scope of businesses and a much larger scale of opportunity. The traditional assessment framework of a business such as early eShares was to look at it in isolation comparing the business to companies such as Solium and concluding that the TAM was roughly $1B in revenue. We were at Social Capital at the time and took a contrarian view along with Menlo Ventures, ultimately co-leading the Series C at a $320M post-money valuation.
  • Equity is the atomic unit powering the entire stack of entrepreneurship
  • Widespread distribution of Restricted Stock Units beyond senior executives began in the early 2000s (reference). **The importance of this practice becoming widely adopted cannot be overstated. **Prior to this, extremely high-skilled individuals creating value that could be scaled globally with technology did not have a way of benefiting commensurately from their ingenuity and impact. **Without equity, it’s not possible to align incentives in a way that is attractive to highly skilled employees relative to other employment. Widely-owned equity is the mechanism by which entrepreneurship spreads **from just the founder to the entire team of employees who devote substantial portions of their working life towards building something whose rewards they can take part in. Teamshares
  • To give a sense of the scale of dominance that has been achieved, by our estimate, Carta holds the ownership graph of 35% of all venture backed businesses. Framed as equity value, they have over $1 trillion USD in total equity value managed on their platform today.
  • In the next 12 months or so Carta aims to launch CartaX, the first issuer sanctioned platform for the buying and selling of private company shares at scale. As we established earlier, **there is a dire need to offer regular liquidity in the private markets to propel entrepreneurship. **To put a number on the gap in liquidity that has emerged as companies stay private longer, consider the following.