Juvo Capital

Juvo Capital Partner Interviewed by NPR on Secondary Markets

Recently, I had the pleasure of being interviewed by Ilya Marritz, a reporter with WNYC, for a NPR story on secondary markets for shares in private companies like Facebook. I was interviewed for 30 minutes in the KPCC studio in Pasadena, CA and that turned into about 30-45 seconds of material in a 5 minute report. One of the main messages of the report was that secondary markets are generally unregulated and that the buyer often lacks information to make an informed purchase.

I completely agree that information asymmetry is a fundamental problem in the secondary markets, but I would argue that this asymmetry exists in public markets as well. While a public company has the fiduciary responsibility to make material information public and available to all shareholders simultaneously, there are legions of analysts who can employ their intellect to develop company financial models, do market checks on sales channels, speak with suppliers and competitors, attend industry conferences, and better understand the company than your average investor. In my opinion, there is no way that an average investor can generate an above market average return over the long-term based on better fundamental analysis. However I believe that there is still an opportunity to learn enough about a private company to have a fundamental edge over the average private company investor. I’ll give a few examples.

I first learned about the company, Chegg, from a report by Stephen Carpenter on TechCrunch. In his article, Stephen took a few pieces of public information and was able to model potential revenue for the company and demonstrate that the company was growing like wildfire and likely was already at a $100 million plus revenue run rate. It remains to be seen whether his numbers were accurate, but they were clearly directionally correct. Chegg later took the action of not listing how much they had saved students off list price on their website (which could be back-solved to identify revenue) and changed their policy of planting one tree for every book rented to one tree for every order made which also obfuscated their revenue and growth. I took Stephen’s analysis one step further by looking at all of the top books rented on their site, and calculated how many times Chegg needed to rent their book out before breaking even, and was able to identify the average life of a textbook before a new edition was published. Much like GoTo.com before it, Chegg’s model was completely visible to anybody who visited the website. We ended up buying more than 1% of the company.

In the case of Tesla Motors, I was able to ask questions at the car dealership to determine that the company was producing 25 cars a week by the summer of 2009 that were being sold with options for considerably more than the base price of $109,000 each which suggested that Tesla was at a $100+ million revenue run-rate. That combined with a slightly misleading press release (that has since been taken off the website) from Tesla Motors in August 2009 that Tesla was profitable for that month encouraged me to invest and buy about 0.5% of the company.

Secondary markets remain opaque and information asymmetry will not disappear anytime soon. An investor that has a fiduciary responsibility to limited partners will generally not be able to obtain the information they need to make a buying decision unless they have insider information, or will not have the time to do their analysis before another buyer completes the transaction. This suggests that there remains a limited window of opportunity for people that are comfortable making substantial financial decisions on limited information quickly.