From Goldman to Morgan Stanley: Wall Street seeks to expand investor access to startups. Bloomberg - In a few weeks, some of the largest Wall Street banks have positioned themselves in a territory historically dominated by venture capital. First, Goldman Sachs agreed to buy Industry Ventures, a company that holds stakes in 800 venture capital funds. Weeks later, Morgan Stanley closed a deal to acquire EquityZen, a trading platform for shares of private companies. Charles Schwab followed suit, buying Forge Global Holdings, a competitor to EquityZen. The trio of acquisitions will provide business flow, data, and relationships with fast-growing startups to institutions that traditionally focus on publicly listed companies. But it will also open a path for clients to bypass venture capital funds. Instead of disbursing resources to become an investor (or limited partner) in a VC fund or investing in a 'continuation fund,' where the manager sells part of the capital and gives partners a chance to exit, investors can use these platforms to make smaller, more targeted bets. For venture capital firms, this move may threaten a long-standing business model. With more options to trade shares on the secondary market and something akin to a market that helps define valuations, managers may face difficulties justifying their current fee structure. Most charge about 2% per year on assets under management, plus approximately 20% of the fund's profits - a model known as 2 and 20. The fees are relatively high compared to other wealth management or investment services and help offset the risks taken by VCs when betting on early-stage companies, most of which do not yield returns. 'We will see venture capital fees split drastically over time,' said Javier Avalos, CEO of Caplight, a secondary trading platform. 'Imagine that a high-net-worth investor can directly access innovative and already mature private companies through their own brokerage, paying only a nominal fee. Why would they pay 2 and 20 to enter a blind pool fund and hope that fund manages to invest in the same ten or twenty most sought-after companies?' EquityZen and Forge allow qualified investors and high-net-worth individuals to buy and sell stakes in private companies, mirroring the operation of a traditional stock exchange. With them, Morgan Stanley and Charles Schwab will be able to offer more services to shareholders of private companies. Industry Ventures will give Goldman access to information about the companies that most pique investor interest. These operations exploit a relevant shift in the investment landscape. Startups have remained private for longer, keeping some of the most interesting companies away from public markets and preventing early investors and employees from realizing their gains. At the same time, the rising valuations of private technology companies - such as the AI giant OpenAI - have been stimulating demand for their restricted shares from a larger number of investors. 'Since the acquisition announcement, we have received many inquiries from our entire global client base because it is difficult to get access to high-quality venture capital,' said Michael Brandmeyer, director of investments at the external investments group of Goldman Sachs Asset Management, the division that will house Industry Ventures when the deal is completed. A Morgan Stanley spokesperson referred to the press release about the purchase of EquityZen and preferred not to comment further. A Charles Schwab representative did not respond to the request for comment. The new challenge arises at a difficult time for VCs. The median age of a U.S. company at the time of its IPO reached 14 years in 2024, according to research by Jay Ritter, a professor at the University of Florida's Warrington College of Business. This is the highest level since 2009, when global financial markets collapsed during the credit crisis, according to his data. As companies wait longer to go public, the number of IPOs has decreased, eliminating one of the main ways venture capital funds recover their investments. U.S. VC firms recorded a loss of about 6.4% over the past three years, according to an index of over 2,500 managers monitored by Cambridge Associates. The secondary market has been growing steadily over the last decade, and Industry Ventures predicts that trading volume should reach $122 billion in 2025. For comparison, there were only about $21 billion in tech IPOs this year, according to data compiled by Bloomberg. 'The trading areas of banks will find ways to act more actively in private companies,' said Brandmeyer. 'Still, the most interesting companies remain very difficult to access.' Even so, Mina Mutafchieva, a partner at HV Capital, stated that although secondary platforms have the potential to democratize investment in private companies, there are hidden risks. Investors may be surprised by the lack of information compared to listed companies, which must comply with regulatory requirements for disclosing results. Private companies may have complex share structures that do not favor those buying shares on the secondary market. The general partners of VCs - who do the work of deeply understanding a startup and guiding it - offer more security to investors, she said. 'When you are an LP [limited partner] who invests capital in a fund, you know that the GPs [general partners] are investing alongside you, have their own capital to lose, and are experts,' said Mutafchieva. 'When you invest through a platform, do you really have enough visibility to make the right decision?' Most private companies also do not want to see their shares circulating in the secondary market like those of listed companies and therefore impose restrictions to prevent sales, said Tom Callahan, CEO of Nasdaq Private Market. Most of the growth in the private company market should come from offerings led by the companies themselves. 'The lack of liquidity of private shares is a feature, not a defect,' he said. Increasingly, private companies are turning to these sources of capital outside the VC universe because the volume of resources they seek exceeds the availability of venture capital funds. This is the case with Revolut and Stripe. Both fintechs recently offered shares to Goldman's asset management unit, which passed them on to the bank's wealthiest clients. It is the latest sign that VCs will have smaller stakes in more mature companies going forward and will need to compete more often with other investors - such as banks and asset managers - for influence. 'I agree that this has been creating some tension in the very late stages, regarding who should capture the value,' said Mutafchieva. 'Ultimately, our game is to be there as early as possible.' Late-stage venture capital funds should resemble more 'the purchase of an index of the best-performing private companies and charge something closer to what passive managers charge in the public market,' he said.

Morgan Stanley to Acquire Leading Private Shares Platform EquityZen