Thanks to all who completed our survey over the last few days. It was humbling and energising to receive the quality of responses – we’re very lucky to have an engaged community that genuinely cares about growing this fledgling market in New Zealand.
We’ve outlined your key points and how we're responding to each below.
Quality over quantity
There was overwhelming feedback to keep the quality of deal flow high. Many people expressed that they’d like to see more companies on Snowball, but only if the existing vetting standard remained.
We've aimed to keep the deal flow quality up by only facilitating offers that we think will have a good chance of funding success. As a platform, we do not give financial advice or comment on the merits of an offers - it's up to investors to determine whether an investment opportunity makes sense to them. However we've tried to weed out offers that investors would not find worth assessing. We remain committed to this approach. We want investors to have good experiences, and to make repeat investments over time. We think that investors will get more value from a curated marketplace as we currently provide.
Types and stages of company
Investors were most interested in early stage companies, but there was significant appetite for startup and growth companies.
Here are the responses to preferred type of company:
We plan to facilitate companies across a range of types and stages, subject always to our judgment of whether there’s likely to be sufficient investor demand for a particular offer.
We received a large amount of feedback regarding the secondary market trading of shares. This supports the research we did before launch which indicated that liquidity is an important characteristic for some investors. As a result, secondary market development is something that we have given significant thought to.
First, some background.
There are broadly 4 ways to realise a return on investment in a private company:
Many early stage companies will not be successful. They will not reach listing, or sale of the business, or pay dividends. In these cases, some or all of the investment will be lost.
But others will come alight and return multiples of the entry price. Those that are successful may have a long period before listing, or sale of the business, or high dividends. During that period, many investors will have absolute comfort with the longer term liquidity pathways that are outlined in an offer. For others, their investment objectives may change, or their views about the company may change, or their personal circumstances may change. As a result, they may start to think about early liquidity.
For most investments in private companies, the only short or medium term option for realising a return is by selling shares privately. The problem is that there’s currently no central market for people to trade shares in private companies, so it can be hard to find a buyer.
Without a central market, it’s also difficult for traders to feel informed about current valuation, making them less likely to trade. The advantage of disclosed share trading prices is that the uninformed can rely on the informed to bid up unduly pessimistic prices, and to sell down from unduly optimistic pricing. You see this every day in the way people refer to Trade Me to get a feel for what their car may be worth. They do not try to work out what it should be worth by its specs. Instead they look for similar transaction to understand what others think that kind of car is worth.
We’ve developed a proposed market design, and have spent the last 6 weeks seeking feedback on our design with companies, investors, brokers, NZX, and investment bankers. The decision whether to proceed will be driven by demand from companies.
How has our proposed market design been received?
Most investors we spoke to were accepting of the lack of liquidity with unlisted equity investments. However in terms of the proposed secondary market, investors and other stakeholders were very positive about its design.
Companies that have raised through Snowball were more hesitant. They haven't had their new shareholders banging on their doors wanting liquidity (which we were happy to hear, because investors shouldn't expect liquidity with unlisted equities). So companies were inclined to wait until liquidity became a higher priority.
We’ve been relatively quiet about our proposed secondary market because we don't want investors to have overblown expectations of the limited liquidity that may result. A market won’t make it easy to trade shares. Investors are likely to experience a “liquidity discount” when selling. It would not be nearly as liquid as a regulated market like NZX. But it would be better than what we have now – it will bring buyers and sellers together into a market at a point in time.
There was significant comment about pricey valuations. We see the following tensions arising as a company works through its valuation process.
First, there’s the obvious incentive for a company to value itself high so that existing shareholders retain more equity.
However there’s a number of incentives for a company to set a valuation that’s perceived as fair by the market:
We’re well aware of the comment about valuations creeping too high, which would unbalance the risk / reward profile of this market and ultimately make it unattractive. Our offer preparation process has evolved as a result of this feedback.
While it's up to a company to set its own valuation, we now engage with companies to help them set a reasonable valuation in 4 ways. The most recent group of companies have found these tools very helpful. We will continue to monitor market feedback on valuations and evolve our process accordingly.
Please let us know if you think there are other things we could be doing. For this market to thrive over the long term, investors need to be making returns that are commensurate with the risks. We’re committed to taking action where appropriate to assist in the sustainable growth of this market.
Thanks again to everyone who provided feedback. Please get in touch with Josh Daniell at [email protected] or 027 634 2463 if you have further comments.