After a prominent client complained that Carta was misusing information entrusted to it, scaring away many of Carta's tens of thousands of other clients in the process, Carta is exiting the business that caused it problems with the client.
Carta co-founder and CEO Henry Ward posted on Medium recently that: “Because we have the data, if we market secondary, people will always worry that we are using the data, even if we are not. That is why we have decided to prioritize trust and exit the secondary commercial business.”
It's a dramatic turn of events for Carta, which originally focused on cap table management software, but over time began to evolve into a "private stock exchange for companies" to tap into the network of companies and investors who already use your platform and where you have ideas. The big idea was to become the transfer agent, brokerage and clearinghouse for all private equity transactions in the world.
While the move made Carta more valuable in the eyes of its venture backers, a company has to scale after all! – put Carta in a dangerous position after a Finnish CEO, Karri Saarinen, posted on LinkedIn that Carta was using information about his company's investor base to try to sell its shares to outside buyers without the company's knowledge or consent .
wrote Saarinen, whose project management software company Linear He is four years old and a Carta client: “As a founder, I felt terrible that Carta, whom I trust to manage our capitalization table, is now cold contacting our investors to sell Linear shares to its buyers without disclosing them.” Saarinen continued: “They never contacted us (their client) to start an order book for Linear shares. The investor they contacted is a family member whose investment we never published anywhere. We and they never opt for any type of secondary sales. However, Carta Liquidity found their email and learned that they owned Linear shares.”
While Ward publicly apologized to Saarinen, blaming a dishonest employee who "violated our internal procedures and went out of bounds to reach out to clients they shouldn't have," Saarinen continued the discussion very publicly, saying he had identified numerous others. founders whose investors had also been contacted by Carta representatives without their knowledge.
In his latest post, Ward downplayed the impacts of ending secondary trading at Carta, saying the revenue derived from the practice is minuscule compared to Carta's other trading offerings. According to Ward, Carta's capitalization desk business "is about $250 million a year, fund administration is about $100 million, private capital is about 20 million dollars and the secondary trading business is about 3 million dollars. Carta, he added, has done a "decent job building the cap table business, a good job managing funds (but feeling the growing pains), and an abysmal job in the secondary business."
Furthermore, he continued, having valuable customer data that others don't is not the superpower others may think; certainly not if Carta is going to be a good player in the private enterprise ecosystem.
In a humble tone, Ward wrote that “ALL of my liquidity ideas (auctions, investor matching, secondary trading, takeover bids) have not worked. “I may not be the businessman who can solve this problem.” In fact, he continued, “Letter might not be the company which can solve this problem. Many people think that we are in a better position to solve liquidity because we have data from the cap table. But that same argument is used for data products. People say, 'You have all the data, so you should close Pitchbook!' But it is precisely because We have the data, we cannot use it. It is our clients' data, not ours. That's why in ten years, Carta has never released a data product. I use Pitchbook when I research a company before meeting with the CEO.”
“Having real data on the ground is not an advantage if we cannot use it. And it's a disadvantage if people think we use it,” Ward added.
To Carta's credit, the decision to retire from the secondary sales business came quickly; Carta also seemed to have little choice, as many founders threatened to move their startups' business elsewhere following the events.
As founder Sim Desai of financial services startup Hiive wrote on LinkedIn, Carta apparently abused Linear's trust (possible to fix) and his lack of experience (hard to fix), Carta faces another impossible conflict between these two business models. Even if they don’t use their clients’ confidential information, what will get in the way is the optics of a potential breach.”
It remains to be seen how the move will affect Carta's own valuation.
