Wrangling the Pre-IPO Unicorn

Auckland, 22 December 2023 

Welcome to the latest issue of the Obris Global Investor Newsletter.

It is no secret that the Obris team combs the planet for unique investment opportunities that will produce outsized returns.

Some of the best opportunities that we have historically capitalized upon are in acquiring shares in mature unicorns. We delve into unicorns and tell you about our processes and exits in this issue.

As always, if you are not yet a member of Obris and want to learn more about membership, our events and investments, please get in touch with us – send us an email and we will follow up. You may reach us @ investors@crowncapital.nz.
– Marvin

Unicorns are mature private companies that have reached an iconic status in terms of market share and recognition. AirBNB and Uber are examples of unicorns before they were listed on the public markets.

Coinbase is a stellar example of a unicorn for Obris. We purchased a significant number of Coinbase shares from a seed investor a few years before the company IPO’d. Upon exit at the time of the IPO, our investment resulted in a 187X return.

While our Coinbase exit was extraordinary – and we can’t promise we’d do it again – we expect at least 3X returns from our private equity investments.

It is difficult for smaller investors to access unicorn type opportunities like Coinbase, Uber, or AirBNB prior to their IPOs. Good companies attract large institutional investors that leave minimal purchasing opportunities for smaller investors.

Buying at the IPO is equally problematic. It is our experience that most investors who invest at IPO (or close to it) do not get the best value for their investment.

Even the best companies have a hockey stick type of graph for the share price when they are first listed. This means the shares tend to go down after the IPO and slowly climb up (they hope, exponentially).

The share price typically dips because if the share price just kept rising following the IPO, the company’s board did not price their stock correctly, and therefore, could be sued by shareholders for undervaluing the company.

As such buying at IPO requires a degree of confidence on the future strategic direction of the company to make a good investment.

Investing in secondary stock, which is typically already priced with an illiquidity discount, just needs confidence that the company will have a successful exit which is typically (but not always) in the form of an IPO.

The timing of exit is also more certain. At that point, we at Obris will aim to exit and return capital and profits to shareholders rather than stick in it for the ‘long haul’.

The Secondary Market
For myriad reasons some unicorn shareholders need to sell their shares before a significant liquidity event like an IPO. They may be employees needing some liquidity from their employee share scheme. They may be early investors that have reached their maturity horizon and thus need to exit. Or, they may just need the money.

I can think of multiple instances where early investors timed large purchases around an anticipated exit, only to be caught with a significant bill when the exit was delayed.

Just as unicorns are nearly impossible to find, the secondary market for pre-IPO shares is difficult to access. The opaque market is reserved for a small number of brokers and large investors who essentially know the right people.

To that end, Obris, which is a known buyer of secondary stock takes advantage of these opportunities when they become available.

We negotiate with sellers on terms that take advantage of that illiquidity discount. This means we almost always have a reasonable discount to the last funding round.

Wrangling Kraken
In 2021 and 2022, Obris acquired several large blocks of pre-IPO Kraken shares from early investors who needed to cash out. The crux of the deal was to ensure there was a sufficient illiquidity discount for Obris to take into account the volatile nature of companies involved in the crypto industry.

We expect that as the current crypto rally continues, Kraken which has already alluded its intention to file their SEC Form S-1, will likely do so in the next 18 months. Companies file an S-1 in anticipation of their public offering.

Wrangling Sharesies
Sharesies is the largest share brokerage in New Zealand. Their digital investment platform aims to make investing easy and accessible for everyone. Their moniker is straightforward:

The company was founded by a group of people who believed that investing was too hard, too complex, and too scary for many people. They wanted to create an accessible platform that would give people confidence and control to invest.

Their revenue has grown significantly, and the company has diversified. As such the company is well positioned to continue growing toward IPO.

As with our other secondary share offerings, we negotiated a strategic investment at a valuation from three years ago, plus a further 20% discount.

The closest industry comparative we have for a similar stock is Robinhood in the US which has a similar business model. When the stock first IPO’d, it was trading at US$38 a share which gave it a market capitalisation of US$32 billion. This represents a bit over 3X for investors that had only invested less than a year prior to IPO.

While no two companies are exactly the same, we are expecting at least this much in multiplier – if not more – from Sharesies. Our strategy for this company is to exit the position at IPO which we expect will have the greatest return and will return capital and profits to investors.

The Principles of Investing in Unicorns
For Obris, investing in Unicorns comes down to largely three principals:

1. Access – A combination of name recognition, proactive research and reaching out to tired early investors provides Obris access to the deals.
2. Valuation – An illiquidity discount is necessary to create worthwhile outcomes. 90% of the success of the deal will come down to valuation; that is the only means to provide even a faint hope for an exponential return.
3. Exit – This is always forefront to every investment we undertake. If the timing is too far off, any gains you’d get from the valuation will evaporate. The longer an investment takes, the returns will become less attractive.
   
   Even companies that hit it out of park will only enjoy unicorn status for a finite period. A poor entry price and/or a long exit will reduce a great deal to merely a good deal.If an exit takes even longer, an average deal becomes a deal that no longer provides a premium over your opportunity cost of capital.