Tom Callahan, CEO of Nasdaq Private Market (NPM), recently joined Private Market Talks to discuss the private company secondaries market – a historically opaque and inefficient market – and the challenges faced by investors, founders and employees when they go to trade their shares. He also takes us through how NPM is uniquely positioned to create a transparent, tech-friendly, efficient and trusted platform for trading of these secondaries. And, with over 30 years of experience in the financial services industry, Tom also shares his advice for anyone with an entrepreneurial spirit looking to make their mark in the sector.
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The Rise of Private Company Secondaries
Peter Antoszyk: Many of our listeners are founders or investors in early – to – late stage private companies. Those investments, by their very nature are illiquid, and, especially in today’s current market, the hold period is getting longer and longer. As a result, there is a growing need among founders, employees and investors in these companies to sell their shares for liquidity or to rebalance their portfolio strategies. As a result, a narrow segment of the private markets industry – private company secondaries – is gaining traction. The old school process for connecting buyers and sellers of these private market investments is both time consuming and cumbersome. But as with many things today, technology is rapidly changing how these investments are transacted, creating a much more efficient market and fueling the growth of this industry.
But what are private company secondaries, what makes them attractive, how does the technology work and what risks should buyers and sellers be aware of in these secondaries?
Tom Callahan joins me today to answer those questions. Tom is the Chief Executive Officer and Manager of the board of managers of Nasdaq Private Market, a leading global – technology driven – platform that facilities the efficient trading of private company secondaries.
He has 30 years of leadership within the financial services industry. Prior to Nasdaq Private Market, he served as the head of Global Cash Management and a member of the Global Operating Committee at BlackRock. Tom led the transformation of the firm’s global cash management platform, a $700 billion business. Previously, Tom serves as the CEO of NYSE Liffe U.S., the U.S. futures exchange of NYSE Euronext and prior to that he held various leadership positions at Merrill Lynch. Tom also has a soft spot for rescue dogs.
As with all our episodes, you’ll find a complete transcript of this episode, together with other helpful links, at Private Market Talks.com. And as always, please “subscribe” and hit “like”.
And now, my conversation with Tom Callahan.
Peter Antoszyk: I want to thank you for doing this. I appreciate you joining us on, on Private Market Talks. I’m really excited to talk to you because I think the story of NASDAQ Private Markets is, is, is interesting and it occupies an interesting niche within the private markets. I think that this is going to be an interesting conversation for our listeners and for myself frankly.
Tom Callahan: Well, I’m excited to be here, Peter. Thank you so much for inviting me to; it’s a great honor.
Peter Antoszyk: Before we dive into NASDAQ Private Markets, it would be great just to get a little bit of background about yourself and, so your journey, how you found yourself at NASDAQ Private Markets.
Tom Callahan: Sure. Well, this year and I can’t believe that, you know, saying it out loud, I’m celebrating my 30th year in the financial services industry. And I’ve done an, an awful lot of different things, Peter, and I started out the beginning of my career back in the 90’s. I was, I was a bond trader. And, and those were back in the days pre‑algo trading, pre‑computer trading, pre‑microsecond execution, it was trading floors with big gorillas like me. I’m — we haven’t met in person, but I’m six foot six, so they like big guys because we were intimidating on the trading floor and that was the sort of equivalent of co‑location at the time. That was your strategic edge.
Peter Antoszyk: Right.
Tom Callahan: So, I went from that to, you know, today’s world where, you know, everything is done silently by computers in fractions of a second. So, I’ve seen kind of the full evolution of market structure and that’s been really, really exciting for me. Along the way, I’ve done a whole bunch of different jobs, but I would say the commonality between all of it after I left trading was either starting new businesses or fixing broken ones. And surprisingly, those two things have an awful lot in common. So, you know, I was sent to, to Europe for five years, living in London with Merrill Lynch fairly early in my career and, and rebuilt their rates trading business there, ran a prime brokerage business back in New York after that, and then, right around the time of the global financial crisis, you know, I, I really got very concerned about the state of the, of, of, of the global banking system and thought that a, a good refuge might be to go work for an exchange, thinking that maybe, you know, the OTC markets, which were really at the epicenter of all the problems back in ’08, that there may be a big push to on-exchange trading. So, I went to the New York Stock Exchange in 2008 and ended up building and being the CEO of their U.S. Futures Exchange, which we actually spun out of the NYSE and created a consortium around that. So, I, I built a, an exchange, I built a clearing house, which not many people have done, and that business was sold to ICE as part of the NYC Euronext Acquisition back in 2013. Left that to go to Black Rock, world’s largest asset manager, and spent nine very happy years there. That went into the category of a, of a business repair, the, I’m not sure how much you know about the cash management or the money market business, but that was a business that’s somewhat spectacularly, kind of across the industry, had fallen on hard times. Not at Black Rock, but there were other very high profile money funds that broke the buck and needed to be bailed out, and, so the cash management industry, which for Black Rock was one of the core businesses that actually built and helped to found the firm, had really, you know, lost a lot of assets and, and fallen on hard times. So, they asked me to come in, in 2013 and rebuild that business. So, nine years, you know, we took their assets from 250 billion to 750 billion, so added a half a trillion dollars in assets, rebuilt the tech, the products, the people, everything, and that was really just a fun, fun journey at an amazing company. But I really did miss the startup world and the energy and the passion, having done it once before. And so, you know, I was approached in 2022 about this job and honestly, Peter, didn’t really know that much about the private market.
Tom Callahan: So, I was sort of an exchange and a cash management and an asset management guy.
Peter Antoszyk: Not, not, not many people did, by the way, at that time.
Tom Callahan: Yeah, and, and what I discovered was this four trillion dollar asset class hiding in plain sight. You know, it’s four times the size of the crypto market. It’s about the same size as the U.S. municipal bond market. But when I looked at it, it honestly looked like the bond market in 1970 or maybe the public equity markets in 1920. Just primitive, no infrastructure, no data and just a market that really needed to be completely transformed and evolved as every other asset class, you know, that has seen. So, it just struck me as an amazing unique opportunity to come in to do something really big and really transformational. And I got excited and took me back to my, my entrepreneurial roots. So, that’s been more or less the, the journey.
Peter Antoszyk: And so, tell me about Nasdaq Private Market. It’s, it’s not part of NASDAQ, just to be clear to our listeners, right?
Tom Callahan: It is. Once upon a time, it was part of, of NASDAQ, and that’s part of the story. So let me, you know, pick it up there, which is kind of the birth of NPM, as we call it, NASDAQ Private Market, and the birth of the private market sort of happened concurrently and what was the trigger, and I’m sure you know all this, Peter. Really the starting gun for the hyper parabolic growth of the private markets that we’ve seen was 2012, the passage of the Obama era legislation, the JOBS Act, and what did that do? It really liberalized the ability of private companies to take on more shareholders, there previously had been a cap at 500 shareholders. So as a private company, once you got to 500, you wanted to raise new capital. You were sort of forced to go public. So, 20 years ago, the average company IPO’d at five years old. Now here we are, you know, in 2023, the average company IPO’s at about 14 years. So, the JOBS Act just made it easier for private companies to stay private because it allowed, it put the cap at 2000 shareholders. And so, I think, you know, in parallel to that, there were some other macro evolutions, the hyper growth of venture capital. So not only could you take on more shareholders, there was this massive, just, reservoir of private capital waiting to be deployed into private companies. So, these two forces collided. You know, there was 40 unicorns a decade ago. Unicorn, obviously, private company with valuation over a billion dollars. And today there’s about 1000. So it’s an asset class that has grown. And so, for the sort of eight, nine years that NPM was part of NASDAQ, it did one thing. And it did one thing incredibly well, and it sort of created a new industry, if you will, and that was running private company tenders, there’s been tenders in public companies forever, but really up until then there really hadn’t been a lot of private company tenders. So NPM built a piece of technology and our core client was, and in, in many ways still is, private companies. So, what do they need? When you’re a private company, if you’re going to wait 14 years to IPO, you know, the majority of private company employees get paid in shares, those shares vest and at some point along the journey, those employees want to buy houses or pay off student loans or pay for weddings. Or all those things that people need to do. And if you’re a 25 year old private company engineer, it’s awful hard to say, “Well, you know, wait till you’re 39 to buy your first house because that’s when you’re going to actually get liquidity in these shares,” so as these shares vest and people, and employees need liquidity, it really becomes a critical retention tool for private companies to be able to convert those vested private shares into cash. And so that’s what tender programs are. And so MPM runs tender. Programs for large decacorns with 8-9,000 employees and some of the biggest private companies, you know, in the world all the way down to small local hospital systems with 20 or 30 doctors that, that need to run, you know, private liquidity programs and everything in between. So that’s what it did for a very long time, until 2021, when really I think a group of global banks got together and we’re looking at this, this asset class and thinking we need to find a way to modernize it. We need to create a platform that’s trusted, that’s institutional, that has real regulation, that has real technology. We need to have a place we can go and transact with confidence because think about a big global bank, Peter, they have a private wealth business that has a lot of entrepreneurs that own private shares. Or maybe they want to invest in private shares, and they cover venture capital firms and they cover big buy side firms that have capital that they want to deploy. So, for a lot of these banks, they’re some of their biggest and most profitable clients are heavily, heavily exposed to private markets. And so not to have a place that they could go and transact with confidence is a serious problem. So, they approach NASDAQ about spinning the company out. We are, as you say, an independent company now. We preserved the brand because NASDAQ is such a powerful brand and it engenders so much trust and confidence. So we kept the name. But we’re now an independent company owned by a group of five banks, and we’re actually in the middle of our own Series B, ‘cause of course, we’re a private company ourselves, and we’re about to add a group of new partners as well.
Peter Antoszyk: So do you cover any particular sectors or asset classes?
Tom Callahan: I’d say the majority of our clients are very tech, you know, health tech of focus. If you look at the complexion of unicorns, I think something like 70% are in the technology sectors. But as they say, we do all types of different clients. In all different types of sectors, but it is very, very heavily weighted towards technology.
Peter Antoszyk: And in terms of the companies you tend to work with, are there any types or any points in the life cycle of those businesses that you tend to focus on more, or tend to get involved in more than others?
Tom Callahan: Yeah, it tends to be the more mature companies and we’ve done, you know, companies as small as Series A, but in general, you know, as companies get larger, more mature, take on more employees, especially if they’re competing with a public company, because think about it, if you go to work for a public company, you know you’re given shares, usually in the form of RSU’s, they vest every three years and when you get them, you can sell them, you know, on your Charles Schwab account. It’s a pretty simple, straightforward liquidity mechanism. Well, if you’re a private company and you’re paying people in illiquid private shares, really, it gets to be a critical employee retention tool, so tends to be larger companies, I’d say mostly when they get within sort of 24 months of an IPO, that’s the point where you want to offer liquidity to some of your very early round seed/Angel investors. You know you want to clean up the cap table. You want to bring in larger, more strategic investors, maybe those early round investors that help to get you, you know, from, you know, start up in your mom’s garage, to Unicorn, you know, their strategic value is less and you want to bring on new investors. So, there’s a need some time to clean up the cap table. Obviously, as they said, offering liquidity to employees. So, it tends to be in the later stage that clients get, that our, that our private company clients tend to get most active.
Peter Antoszyk: So, you described three key aspects of NPM, you described, you said there are three things that the banks were looking for: technology, trusted platform and a regulated platform. I’d like to touch upon those three things. Maybe could walk us through how they sort of how you hit the mark on each of those, and let’s start with the NPM technology. Can you describe the technology framework of NPM?
Tom Callahan: So our approach, Peter, to this space, is — you know it’s grown incredibly in the last decade. But what has not grown incredibly is the infrastructure to support it, there really is none, and when there is no technology, when there is no infrastructure, what’s left, it’s just humans in the loop. So, what I would say traditionally, for most of the last decade, the dominant players in the, in private secondaries have been small boutique brokers. Their commissions tend to be very high; five, six, seven, eight percent. There’s not a lot of transparency if you’re a buyer or seller or private company shares. There’s no tape. You can’t say where’s the last place this traded. It’s, it’s a workflow that I’d say has a lot more in common with buying and selling residential real estate than it does buying and selling a share of Apple. It’s just sort of this forest of friction and inefficiency. And so what am I talking about? The average time to settle a private market trade historically has been about three months. When you transact, you know in your brokerage account, Peter, you don’t spend a nanosecond worrying, “Oh, my God, I just sold those shares in Apple. Is that going to settle? Is the money going to show up?” Like, that ever crosses your mind. While in the private markets, that’s a huge, huge problem, because it really is such a clunky sort of analog process.
Peter Antoszyk: I would imagine also in the types of businesses that you’re primarily focused on, technology types of business, three months. A lot can happen in three months. That really could impact the to the transaction.
Tom Callahan: Yeah, exactly. So that’s the sort of current state of the landscape is this desperately manual process with lawyers and with signatures and months and months and so that’s what we’re trying to streamline and automate. So what we’ve done is really focus on the workflow, because one of the unique things that I think maybe people don’t quite understand about the private markets is that the company itself is always at the center of a private market transaction because in almost all cases, companies need to approve a transfer of private company shares unlike the public equity markets where they issue equity and it trades and the company doesn’t control that, in the, in the private space they do. So, if you’re a seller, I’m a buyer, you and I agree on price. That’s only gets you halfway there. You have to go to the company and get their permission, and they have to grant it for that trade to consummate. So what we’ve built in our technology is really more of a workflow management tool because if you think about how a bank in this space would service their client, they need to onboard the client. They need to do AML, KYC, there’s something called shareholder verification, which is if you say you’re a seller of shares, there’s no DTCC, there’s no central registry in the private market. So I can’t just take your word for it. I need to, I should go to the company. I need to verify that you are who you say you are and you have the shares you say you have and only the company can verify that. And then there’s other documentations that need to be signed in advance, and that’s all before we match the trade, and that’s what I, you know, again, it feels more like residential real estate then yes, you bring the buyer and the seller together and you match the trade. And then we have this lengthy settlement process. So, what our technology has done is really built an order management system that streamlines and automates all those processes. So it happens efficiently and quickly in one integrated workflow. So, for example, our settlement service can sell trades in less than a week, so radically improved versus the current state of the market. So really, we’re leading with technology and automation and that’s what great tech does, right? Great technology takes clunky, headachy, you know, high friction workflows that no one likes and it streamlines and automates them. And this space is screaming for that. So that’s really been our core strategies. How do we deploy technology through streamlined and automated workflow with the intention of creating better transparency, better efficiency and ultimately better liquidity in, in the private markets. And I think there’s sort of, you know, a higher purpose to all this right now, just given where we are in, in the economy. Obviously in ’20 and ‘21 there was a liquidity-fueled bubble that drove valuations to extremes and there was huge, huge amounts of money chasing. Every asset in the private space and all the frictions, Peter, that I talked about, they existed two years ago, but honestly, there’s just this sort of tsunami of liquidity that overwhelmed it. Well, now obviously, in 2023, we’re in a very different world and all that air has been taken out of the bubble and actually capital is really hard to come by and there are many, many hundreds of great private companies that are innovative with good business plans and frankly, we’re just struggling to get funded because the hangover after the party of ‘20 and ‘21 is acute and someone needs to build a more efficient platform to connect buyers and sellers in this space. Because ultimately, you know, it’s innovation that’s at risk. And if great companies that are doing great things that are disrupting, and are innovative and have a really unique opportunity to have a positive impact on the economy, if they start failing just because of lack of capital, lack of access to capital, then I think that that really is a tragedy and so, you know, that’s as we think about what’s our purpose as a company, really supporting innovation through efficiency is a big part of what we’re doing.
Peter Antoszyk: And so this 2nd component, you have your technology, which has created efficiencies in the market. You also described that it has to be trusted. And that was a key component. Imagine that’s a very important component to your investors. How is it you, how have you met that need?
Tom Callahan: Yeah, I mean, so part of it gets to how we’ve set up the company. We’re regulated under the SEC is what they call an ATS, alternative trading system, which is sort of an exchange-like designation from the, from the SEC. You know there’s the private markets again, given that they have been dominated by, you know, these small boutique brokers, they’re a bit infamous, Peter, for bad behavior. What does bad behavior look like? Well, you know, someone will troll LinkedIn to find, you know, employees or former employees to sell shares and they’ll say, “Oh, a buyer of your shares at X price.” But they don’t really, they’re just trying to sort of scare up the other side and we hear that from our institutional clients all the time. They’re just sick and tired of misinformation people representing that they have, you know, buyers or sellers where they really don’t and they go to act on a price and the trades start falling down and they end up wasting a lot of time and they go to their investment committee because they think they have an actionable, you know, transaction and they go through all that and they go to trade and it was all just sort of a mirage. That’s, that’s been the hallmark of this space, if I’m very honest with you and that’s really what we’re trying to change. So, when orders come to our market, they’re in that regulated framework and everything is verified and everything is authenticated. Errors are exclusive to our market. So, when you come to transact on NASDAQ private market, you know that the price is real. You know that the counterparty is real. You know they’re verified, you know the trade is going to match and it’s going to settle. Now you may be thinking to yourself, “Well, what’s so special about that?” Of course, and you’re right to ask the question. That’s the baseline that every investor should expect in every single asset class. It just hasn’t really existed in the private markets.
Peter Antoszyk: Can you walk me through a typical transaction, what the structure might be? The fee structure might be the process just to put some structure around the concept of this framework that you’ve described?
Tom Callahan: You know, I should clarify that you know, our primary alignment as a company is with our bank partners. We are a bank consortium. Our owners are Goldman Sachs and Morgan Stanley and Citi and NASDAQ, still one of our largest shareholders, as I mentioned, we’re in the process of the fundraise where we’re bringing in a group of new, of additional banks as well. So, really we view, in terms of secondary market liquidity, ourselves as a service provider to the banks. And so, we do not have commission brokers, we’re a platform. We never want to be in a position where we’re competing with our clients and if we had brokers that were sort of trying to win clients away from the banks, that would sort of fail the test of alignments. So the majority of our flow comes to us directly from our bank partners and they have, you know, again, private wealth clients, they have BP’s. They have buy side investors, whoever owners of private shares are, or anyone who wants to invest in private shares. Those tend, trades tend to come to us through our bank partners. Those orders get posted into our market and, you know, it’s, [Inaudible 00:24:10] and sellers meet through our technology, automate all those steps that I talked about before in terms of verifying the shares. You have to go to the company and what, there’s, you know, right of first refusal or a ROFR. We manage that process through our technology. It gets sort of automated that way, and really trying to take the inefficiency and the friction out of that process, then buyer and seller agree on a price.
Peter Antoszyk: I know where you’re getting the deals from. I’m also interested in how people access that, investors access, potential purchasers.
Tom Callahan: Sure. Well, our primary alignment is with the big global banks, Peter, we’re owned by a bank consortium including Goldman Sachs, Morgan Stanley, Citibank and we’re adding a group of new partners through our current fundraise, so that is our funnel that is where our flow comes from and our platform is sponsored access. So, if you’re an investor looking to purchase shares in, in a private company, essentially you need to be sponsored by one of these global banks and then you can come directly into our market. And you can post bids, you can post offers you can transact in our market, but always in partnership with a designated bank because we never want to be in a position where we’re competing directly against our bank partners. So, we don’t have commission brokers on our platform. We charge flat platform fees because that puts us in, we don’t want to be frenemies to our clients. We want to be partners. We want to be a platform, and we want to be a technology provider.
Peter Antoszyk: Makes total sense. So, you mentioned a couple of, of things that I think sound like challenges, and the two that you identified were valuation, and the second is the company needs to consent. I’m sure there are others, but I’d like to start and zoom in on those two. The first one, I think is a particularly interesting issue which is valuation. Which creates two issues, at least two issues in my mind, that I’d love to hear your view. One is, how do you establish value? You know, how does a seller and buyer have confidence in the value? And second is, what has been the impact of the volatility in value over the last year or so, and how have you managed that, to address that on your platform?
Tom Callahan: Yeah, Peter, you just put your thumb on, I think, the most significant challenge facing the private markets right now; traditionally, at least in a bull market, valuation hasn’t been that big of an issue, because as companies grew and raised money in successive rounds from A to B to C to D, their valuations tend to go up, and so if you want to look to see what is the private company worth, you would say, well, where did they last raise money and you know, probably raised money from some of the largest, most sophisticated Sand Hill Road venture capital firms and they say, well, okay, that’s where they all bought in. And so that’s a pretty good metric. So is sort of last funding round plus and for a long time in the market, that’s how valuation was really established in the private markets. Well, what happened in 2022? You saw this radical correction in private market valuations and you saw this, you know, headlines of companies like Klarna, you know, revaluing themselves 85% down. So, let’s remember, you know, in stark contrast to the public markets, where there is a regulated tape, where all the exchanges have to publish all their trade — So you, right now on your phone, Peter, could, you know, pull up your, an app and find out where any stock is trading in a matter of seconds. Well, that doesn’t exist. [Inaudible 00:29:27] Regulatory requirement for a tape. So if there’s no tape requirement so you can’t see where last trades happened. If the last funding round was in ‘20 or ’21, and now, you know, the valuation may be 50, 60, 70 percent lower. How is an investor, or how as a seller of private shares, do you figure out, where is fair value? Where is the market, and it’s, it’s a big challenge. It’s a bigger challenge compounded by the fact that I’d say for about a year, from between about June of ‘22 and June of ‘23, the private markets were for, all intents and purposes, shut down for exactly this reason. Buyers just had no confidence in what a private company share was worth. There was 10 sellers to every buyer, bid offers widened and transaction, volumes really shrunk to a trickle. So, in that world, how do you establish value? Well, a few things need to happen. A., I mean, there has been a lot of macro healing and return of investor risk appetite and I think a lot of investors are now looking at the incredible discounts available in private secondaries right now, and they’re sort of thinking, “This looks like the real estate market in 2009,” you know, where you’re buying, you know, portfolios of real estate at pennies on the dollar. So, an awful lot of capital has been raised to invest in private secondary. So, the buyers have come back. There’s obviously been a healing in the macro and the public markets have really rallied pretty significantly off the low. So I think the macro healing has certainly helped. So the other thing that we do is we look at things like mutual fund marks. We’re the largest mutual funds in the world marking these positions. That’s a publicly available data point. That’s a very, very helpful. There are times where the companies themselves gives us financial data that we can use to help value the companies. We can look at things like private to private comparables. We can look at public to private comparables, and of course we look at transaction volume on our platform. But I guess the long answer to a short question, Peter, is there’s no simple way to do it. It’s a bit art, it’s a bit science, and you really have to stitch together the fragmented information that you have to create something that looks like fair value and that’s a big part of our strategy and our data strategy is to try to create that level of transparency. Now I think in time, regulation catches up with this and there will be more of a regulatory imperative to create transparency. I mean, you have tape A, B and C in the public markets. You have things like trace in the, in the bond markets that is exactly solving this problem, forcing transparency to where transactions are happening. In time, I think that comes to the private markets, but for now it’s left to players like MPM to try to solve that problem ourselves.
Peter Antoszyk: I would think that your, your proprietary data, just on trades that you have done, would be an incredibly powerful tool.
Tom Callahan: It is; trades that match on our platform are incredibly valuable. We also — you know, I mentioned this, this concept of building technology and building fundamental infrastructure. One of the pieces of infrastructure that we’ve rolled out is the settlement service, and we settle trades not only that happen on our platform, we’ll settle any trade that happens anywhere in the private markets. You can trade on a competitor to match bilaterally, maybe a bank matches buyer and seller themselves, but we can step in and settle that trade. And so we’re the exclusive settlement agent for a number of private companies, a number of banks and brokers, so in addition to the trades that match on our platform, as the sort of universal settlement agent, that gives us access to an awful lot of data as well. So again, all these become inputs into, you know, our data models.
Peter Antoszyk: One of the other things you mentioned is that the company has to consent. And, what challenges has that presented for you or sellers? Have you seen a pushback from investors in those companies, or the companies themselves, to permit these types of transactions out of concern for, among other things, establishing a value that they may not want to establish at any particular time?
Tom Callahan: Well, it’s a really timely question, Peter, and the answer is yes. I mean, it’s kind of a crazy system, but it’s how things work. Can you imagine the CEO of a publicly traded company calling the exchange in the morning and saying, “Please don’t let my stock trade below $19.00 today?” Like, it’s laughable that something like that could even exist. Well, in the private markets, that’s exactly how it works. Oftentimes, private companies will set a price, and they’ll say, “Well, my shares aren’t allowed to trade, but we won’t approve anything below X price.” Why? They’re trying to preserve their valuation, maybe they’re doing a primary round — whatever motivations, but it’s not necessarily always a free market in that buyers and sellers match wherever supply and demand meet equilibrium, they oftentimes match where the companies say that they will, and that’s, that’s a huge source of frustration, because what that does is trap capital. You have willing sellers that want to sell shares, you have willing buyers, and then that gets blocked by the company and that really just sort of freezes the system. So, I think a lot of these deals and these transfer restrictions, honestly, were negotiated at a very different time in the market in 2021. You know, I would say there has been a huge shift in thinking around this whole concept of secondary liquidity. A lot of the VC’s themselves, historically, Peter, really didn’t like the idea of liquidity in, in private shares; their view was, “Listen, we’re investing in these companies, and everyone’s interests should be aligned, and you get liquidity when we get liquidity. So, someday we’ll IPO or we’ll sell the company, but until then, you know, we’re all in it together, so no, no liquidity.” That, historically, has been how a lot of VC’s, have sort of been very hostile to the idea of secondary liquidity. I will tell you, in today’s market, that is really shifting, and I’m sure you’ve seen —
Tom Callahan: — impressed a number of big VCs have been reported as being active sellers of their portfolios in the secondary market. Why? Because IPOs are grudgingly reopening now, but very slowly; M&A is still at a relatively low level, so the only game in town for them to achieve liquidity, to return money to their investors, is the private secondary market — and you know, just to be more specific, the average VC investment vehicle’s 10 years. Well, I already mentioned the average private company is IPO’ing at 14 years. So, you’ve got a bit of an asset liability mismatch when the fund itself is 10 years, and you need to return capital at the end of that time, and the assets are 14 years. What do you do? You need to sell in the secondary market. So, I think this problem starts to heal itself a little bit as new deals are done, new financing rounds are done, in today’s market. I think that negotiating more liberal transfer restrictions, so the company doesn’t have the ability to block trades — I think investors are going to demand it because they’re, in today’s world, really understanding the value and the need for liquidity in private shares.
Peter Antoszyk: Any other trends or challenges that you’re facing as you’re trying to grow this business?
Tom Callahan: Yeah, I mean, we already talked about some of the macro headwinds, they’re really starting to abate. You know, for us, it’s been a really exciting couple months. We really just launched the platform in May of this year and spent most of June onboarding clients, but July and August were phenomenal months for us, and really broad adoption of the platform, and I think our timing is good — again, with the macro [Inaudible 00:38:28] to come to market, I think that really, our message of being a trusted institutional platform is resonating with the largest investors and asset owners in the world, so it’s been, it’s been a really exciting, you know, couple months for us to see things really scale, and I think our pipeline for the remainder of the year looks very good. You know, I think the — one of the long term challenges slash opportunities is going to be, you know, regulation, and I know that it is an item that the SEC is focused on, and a number of SEC Commissioners have commented on the need for greater transparency in the private market. I think the view from some Commissioners is that, you know, the JOBS Act really wasn’t meant to be a subsidy program for decacorns, it was meant to incentivize liquidity on Main Street for, you know, very small businesses, but the sort of unintended side effect is, it has created, really, this hyper growth of private companies, and so there’s, I think, a general sense on the back of some of the large private company failures that we’ve seen — Theranos and FTX, and companies like that — that there is a general sense that once a private company gets to a certain size, there should be some baseline requirement for transparency — not at the level of a public company, clearly, but there should be some baseline of transparency. So I think, you know, in time, anything that improves transparency in the private market is good for liquidity, is good for innovation. So, you know, we are, you know, quietly encouraging of that direction. I don’t think it’s anything that’s going to change in the near term, but I think, in the medium to long term, all of those forces are really going to improve secondary liquidity.
Peter Antoszyk: And when you talk about innovation, what’s your view on what the role of blockchain and the tokenization of shares might have on your main business.
Tom Callahan: Yeah. So, we have a blockchain solution on our platform, and we, we think it’s really critical that there’s a massive data problem, Peter, underlying all these things that we’re talking about — because again, without a central registry, without a DTC of the private market, what’s the equivalent in privates? It’s the company’s cap table, and those cap tables change constantly — every time he hires, or fires, or does a funding round, it’s sort of this moving target of who owns what in the company — and that’s a serious problem, because when a company goes to do any kind of liquidity event, you need to know how many shareholders you have, and they share accounts, and who owns what — and so, you know, we have a blockchain‑based registry product that really is a more efficient database, and that’s how I think about blockchain for sort of tracking and registering shares in real time, to have that cap table update problem solved, sort of instantaneously. So, blockchain: I think a lot of people have described the private markets as the perfect use case. If critics of blockchain have said, “It’s a solution in search of a problem,” that problem, I think, is the private markets. And so, we, and I think some others, are really looking to leverage this new technology to create greater efficiency. The tokenization one, I think, is a little bit more complex, Peter, because — I mean, there are some players in our space that are looking to do that. And I think it is sort of logical and tempting to think, “Well, great, couldn’t you just take private company shares. tokenize them, and then they can trade, like, a public stock, or like, an NFT? And isn’t that the answer?” I think the challenge is that private companies don’t want that. They don’t want their shares trading like public stock. They want control. They have these ROFRs. And so I think, you know, if you ask me in 10 years, “Is that the right solution?” I think it might be, but in the near term, the issuers, the private companies themselves, I don’t believe — and they’re telling us that’s not the solution that they’re looking for, because it really takes control out of their hands. So, on that one, I’ll say maybe long term, I’m slightly optimistic, but near term, I don’t think the market is quite ready for that solution.
Peter Antoszyk: So, you’ve been an entrepreneur throughout your career, as you said, building and fixing businesses, and I’m curious what your — what kind of career advice you would have for a young person that has that entrepreneurial drive and spirit?
Tom Callahan: Well, you know, I’m the father of four daughters, and I have two that have graduated college in the last two years. So, you know, I’ve given them the same advice that I’ll give you right now, which is, you know, as, I think as you’re starting off in your career, you can afford to take a lot of risks. You can afford to get it wrong. So, there’s plenty of time to go work for a big company and to be a small cog in a very big machine. But your priority coming out of school really needs to be learning. And so, the place that you were going to learn better value than any NBA is go work for a startup. You know, it’s intense, the highs are high, the lows are low, but you know, you’re going to find yourself a year or two into startup life doing incredible things with incredible opportunities. And it might take you 15 years to get that level of responsibility, you know, in a big, mature company. So, you know, do something crazy, start a business, go work for a startup, try to do something crazy and disruptive. Yes, private companies fail all the time, but the value of the education in doing that is really going to be unique. So, I’m a little bit biased, having worked in big companies and in small companies, but I just think, you know, in terms of the education, the opportunity, the energy, the fund, the dynamism — you know, it’s pretty hard to beat, you know, working for a private startup.
Peter Antoszyk: I couldn’t agree with you more. So, any book you would recommend an entrepreneur — a young entrepreneur should read?
Tom Callahan: Well, you know, listen — and the answer is not specific to being an entrepreneur, but the book that I suggest to everyone, that I’ve read and reread probably dozens of times in my career, is Dale Carnegie’s “How to Win Friends and Influence People.” and I —
Peter Antoszyk: Classic, of course. Classic.
Tom Callahan: Written in 1936, and is as relevant today as it was then, and it’s really, to me, more a book about psychology and how to deal with people. And yes, we live in this tech‑enabled world, but I don’t care — in every industry I’ve ever worked in, it all comes down to people and relationships, and if you’re able to form relationships and influence people — I don’t care if you’re a coder, or a salesperson, or business operations, or whatever you do in any industry; it all comes down to people. And that is the single best reference book that I’ve learned simple things like, you know, how to motivate through positive encouragement, and how not to criticize — basic things like that, that I think, if you adopt them in whatever field you choose, is going to make you more successful, because it’s going to teach you, sort of the basics of interpersonal skills and how to get people to like you, trust you, and how to influence. So, I love that book, and that’s the one that I always recommend, although it is a bit of a — It is very classic.
Peter Antoszyk: No, it’s a great recommendation. I would encourage frankly everyone to read that; it is foundational in my mind. I would have a recommendation for you. It’s called “Rescued” by Peter Zheutlin. It is a book about a fi — He’s a friend of mine who wrote a book about following the trail of rescuing dogs from the south and bringing them to the north, and I know that that is an area in which you spend a fair amount of your off time doing.
Tom Callahan: I do, and I can’t believe I’ve never heard of this book before, and I can’t wait to read it.
Peter Antoszyk: Check it out!
Tom Callahan: Yeah, no, it’s a huge passion of mine; in my spare time, I’m a pilot, I’ve been a pilot for 20 years, and so it might take super seriously. I got my commercial rating many, many years ago, and I have a couple thousand hours of experience, but the thing I love doing most, as you say, is I volunteer for a very large tri‑state area based rescue, and we pull a lot of dogs from the south, from some of the high‑kill shelters down here, and bring them up north. It is just sort of a market problem, Peter. It’s a supply‑demand imbalance. There’s too many strays, and —
Peter Antoszyk: Isn’t everything a market problem?
Tom Callahan: — yeah, the demand for rescues is up here, and so we fill this supply‑demand gap by flying them north. But I’ll definitely check out “Rescued”. It sounds like a great book.
Peter Antoszyk: Well, listen, this has been a great conversation. I’ve learned a lot about the private market secondaries, the mission of NASDAQ Private Markets. I think it is an exciting time for your business and you bring — It’s clear you bring the energy and imagination and entrepreneurial spirit that’s going to drive that business forward. So, really appreciate you taking the time to speak with us.
Tom Callahan: Well, you’re so kind to include me, Peter; it’s been a lot of fun, and yeah, maybe we can check back in, in a year or two and I’ll update you on our progress. It’s an amazing space, and it’s an amazing time in this space, and you know, I’m really excited for what we’re doing, so thank you for having me.
Peter Antoszyk: Perfect. Thank you.
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