Carta is one of the hottest startups in the financial world today, having just recently closed a $500-$600 million round of funding led by new investor Silver Lake Partners. Wondering how does Carta make money? If yes, this post is for you. This article aims to give you an overview of Carta’s business model and how they are able to generate revenue.
As a SaaS database, Carta uses its software to assist startups and private companies with their financing and investors with the tracking of their positions. In addition to managing cap tables, the company makes money by valuations, scenario modeling, private company liquidity, ASC 718 reporting, and other services.
Carta is a SaaS database that helps investors and companies, especially startups, manage and track their finances. Specifically, this means cap tables, valuations, investments, and equity plans. What makes Carta special is that they have gotten very far, a $7.4 billion valuation, doing what many would consider being too niche a market, cap tables.
Ultimately, it would like to build a Nasdaq for private markets and make money by providing liquidity and compliance for all who trade on their exchange.
Business Model of Carta
Carta operates on the business model of providing a platform to help private companies manage their cap tables, valuations, investments, and ESOPs. It is the leading cap table management platform for private companies and provides the most accurate up-to-date data on the private company market.
Regarding the company culture as stated on their company website:
We don’t model ourselves after companies. We model ourselves after professional sports teams.
This means creating a company culture is part of their business model as much as creating products and services for consumers. They also claim to try to solve problems from a “software mindset”, as a SaaS should.
The actual service they provide is a list of financial services, most notably cap tables, for startups and private companies. Other services include investments, equity plans, valuations, compliance, scenario modeling, issuing certificates to investors, and liquidity.
Even though they are established as a SaaS database, they would eventually like to create an exchange for private markets.
Carta is marketed through a variety of media: company website, company blog, news publications, testimonials, podcasts, YouTube videos, etc.
The fact that they have famous publications like Forbes and Business Insider writing about them means that they do not have a problem with “getting the word out”.
Famous clients include Robinhood, Axios, and Flexport.
The target expense, “burn rate”, is $600,000/month. Their plan is to reduce that burn rate over time. Carta’s plan to be profitable is to reduce its burn rate until eventually, the revenues outpace the expenses. Their initial plan was to reduce their expenses by two-thirds over a two-year period and be profitable by 2019.
As stated before, in addition to being a SaaS database, Carta has ambitions to be an exchange for private markets. A special feature that they “push hard” on their site is Carta X.
Carta X describes itself as a trading platform that is “more than just a trading platform. Carta X networks with a variety of investors, including institutional investors in order to ensure liquidity.
Furthermore, they self-regulate and offer compliance regarding other regulatory agencies. Because their transactions are bilateral, the trades do not need to be sponsored, making them cheaper and more tax efficient. As with all of Carta’s other features, cap tables are available.
How Does Carta Make Money?
Carta is a SaaS database that helps investors and companies, especially startups, manage and track their finances. Specifically, this means cap tables, valuations, investments, and equity plans.
A lot has been said about cap tables (or capitalization tables). If you are not familiar with cap tables, they are used for funding startups and private companies.
Let us say that a startup is looking for venture capitalists at a $1 million valuation. If one investor pays $100,000 for %10 of the company and another pays $50,000 for 5% of the company, everything is quite simple, provided that there are no more investment rounds.
However, if there are multiple investment rounds, things can get very complicated.
Let us say that one year later the company has some good revenues and decides to 10x its valuation to $10 million. The first two investors now own a combined total of the company now valued at $1.5 million.
The company decides to have a second investment round and sells another 5% of the company, this time for $500,000 based on the valuation, with the founders controlling the remaining 80%.
That does not sound so bad until round three when the company is now has a valuation of $100 million. This time the founders sell another 10% of the company to two more investors, 5% each, at a price of $5 million each.
That means each round three investor owns the same amount of the company as the round one investor who paid $50,000 and yet they are each paying 100x what the round one investor had originally paid.
They are also each paying 50x what the round one investor who bought 10% of the company had paid even though they each only own half of what that lucky first-round investor owns.
Any sophisticated investor knows that that is how the game is played. Regardless, it is only natural for investors showing up late to the party to feel a little bit underappreciated in this situation, if not downright cheated.
To assuage these concerns, the best approach is to be transparent and show them all of your math and how you have arrived at both your numbers and your valuations.
That math seems simple enough in the above example because we are using round numbers with only three investment rounds and a total of five investors.
However, when you are dealing with ten or more investment rounds with fifty or more investors, things can get a lot more complicated.
Add to that the fact that instead of round numbers you are calculating more precise stakes and valuations, and suddenly there is a lot more possibility for misinterpretations, or even miscalculations, and angry investors.
A cap table, however, eliminates this confusion with a digitized table that is easy to update.
It may seem strange to think that Carta can make such a large business out of what might appear to many as an over-glorified spreadsheet, but it is not just about calculating and displaying the data. It is about the actual presentation to investors.
Remember, startups and private companies have to assuage the disappointment new investors may experience over the profits they could have had, had they invested earlier, while still selling them on the possibility of profits in the future. It is not just about creating cap tables; it is about creating the right cap tables.
Those same irate investors might also question new valuations that have grown exponentially from previous rounds.
Fortunately, Carta also prepares valuations for clients that wish to have this service, so investors of those clients can see just how those valuations are justified.
Liquidity and Carta X
As previously mentioned, beyond simply providing cap tables and other assistance for startups, private companies, and investors, Carta aspires to become an exchange for private companies through their Carta X feature.
Since Carta X has great potential as a fully integrated liquidity source with built-in compliance, this too is a potential revenue source. Goldman Sachs is also in partnership with Carta regarding its Carta X feature.
For those who do not fully understand liquidity and market liquidity, it is the ability to convert assets to cash. Regarding the clients of Carta, this means the ability of owners of positions in startups and private companies to be able to find buyers for their shares.
This sounds simple enough if we are talking about a Nasdaq stock, but it can be more complicated if we are talking about equity within a startup or private company.
Regardless of the increase in valuation of the company in which an investor or venture capitalist might purchase some shares, what are those shares worth if the owner cannot find a ready buyer at any time?
Because Carta X has an advanced software platform geared for finding liquidity within a market that it has itself created, Carta X claims to have no problem finding liquidity for its clients.
Over the past three years, Carta’s valuation has climbed steadily into an impressive 9x from its 2018 valuation.
From December 2018 to May 2019, it doubled. Then, it virtually doubled again from May 2019 to April 2020. Finally, from April 2020 to July 2021 it more than doubled, going up 150%.
Is Carta Profitable?
On the surface, it may seem like Carta is doing good. Its valuation has climbed steadily over the years and has done a 9x since 2018. Its revenue has gone up 50% over a two-year period and has topped $150 million. Sounds good so far, right?
Carta is not making a profit. Although Carta’s core business of selling software is strong, it isn’t profitable yet due to high operating losses. As Carta grows, the company expects to become consistently and profitably self-sustaining.
According to The Information, a person close to the company noted that Carta is not profitable. Moreover, the revenue, currently around $150 million, is growing at only a fraction of the rate at which the valuation is growing. This means that new buyers have paid 46x that revenue, proportionately, in order to buy shares.
The article also notes that Carta does not publicly disclose its finances.
In February of 2021, Carta was referred to by The Hustle as a startup. Since it was founded in 2012, that means that Carta has been a start-up for almost ten years.
Conclusion: How Does Carta Make Money?
It was quite an adventure to dig into Carta’s business model and learning how it makes money. Although the company is relatively young, it already has a huge customer base and a pretty successful business model.
The customers seem to be really happy with it, as many of them have fully implemented it into their daily routine of processing different types of data.
You can always visit the Carta website to learn more about their product or take a free trial to see if this solution fits your business needs.
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