The SEC announced last week that it wants to find ways to let Main Street investors access stage private venture companies. This news item underscores an important trend that is reshaping the industry. Today in Startupland, startup access is the scarcest commodity. Everybody wants an allocation, an opportunity to invest in the very best companies. The SEC story highlights how much has changed in Startupland. In this post, I’ll touch on three.

First, public market investors can’t access high growth companies at the stages they once could. Second, shares in the private market trade at a premium to public market shares. The public market liquidity premium of the 90s has been replaced by a private market access premium. Third, this confluence of factors creates an opportunity for vertical integration in venture, where VCs provide capital at every stage in the company’s lifecycle: from seed to A, B through to pre-IPO rounds.

Public market access to startups. In the late 1990s and early 2000, public market investors were able to buy shares at IPO at the ground floor of the business. Amazon went public with $15.7M in trailing revenues in 1997. Concur went public with $11.7M of trailing nine-month revenues in 1998.

This year, Dropbox went public with $1.1B in revenue. Others include Docusign: $382M, Zuora[1]: $179M, ZScaler: $126M,. These companies are at a radically different scale than 20 years ago.

Private market premium. Twenty years ago, when a startup went public, it was worth more in the public markets than the private markets. Investors were willing to pay for the liquidity premium, the ability to sell stock immediately. Today, you could say there’s an illiquidity premium. More accurately, there is a access premium. Investors pay premia for companies before they go public. This premium can be 50% or 100% depending on the business and the stage. You can’t buy shares in many of the most exciting technology companies in the public markets today at revenue and valuation ranges anywhere close to the late 90s.

Vertical integration emerges as a VC strategy. If access is the scarcest resource, logic guides a venture investor to invest at the earliest stages, and then continue to buy shares through fundraising rounds as an exceptional company grows. In the previous world of venture capital, with smaller funds and capital scarcity, distributing risk made more sense. Today, capital is abundant, and concentrating ownership is a winning strategy. There are many challenges to this including signaling risk and concentration risk particularly if the market should correct; but the rewards are enormous.

The venture industry is evolving. And it is demanding changes both within industry itself, and the adjacent financial markets that serve it, like the IPO market. Today, we are in an epoch where investment access is the scarcest resource, and it is becoming increasingly scarce.

[1] Redpoint is an investor in this company and holds shares.

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