Carta is one of the hottest startups in the financial world today. They raised $500-$600 million from Silverlake Partners. What exactly do these funds mean for Carta? How can they help them grow? Read on to find out! This article gives you an overview of Cartas’ current and future plans.
As an online database for startup finance management, Carta offers its services to both private and public firms. It helps them manage their finances and track their investments.
Carta is a software company that provides financial management tools for small businesses and entrepreneurs. It has been growing at an impressive rate since its launch in 2011, reaching a $7.4B valuation last year.
It ultimately aims to build a NASDAQ for private markets and make a profit by providing liquidity and compliance to all who use its exchanges.
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Business Model of Carta
Carta offers a platform to help private firms better understand their cap tables, valuables, investment portfolios, and ESOPs (Employee Stock Ownership Plans). It is one of the leading platforms for managing cap tables, valuation, and portfolio analysis.
As stated on their company’s official site:
We don’t model ourselves after corporations. We model ourselves after pro sports teams.
Company culture is an important aspect of its business model just as much as creating and delivering high-quality products and services. It claims to be solving some of these issues from a “SaaS mindset”, which means they believe that a Saas should.
They actually offer several different types of financial advisory and consulting solutions, including cap table analysis, investment planning, valuation, and more.
They’ve already been established as a cloud-based software company but they’d eventually like to launch their own exchange for private markets.
Carta is promoted through various marketing channels including its own site, company blogs, press releases, social media posts, podcasts, YouTube videos, and others.
They don’t have any trouble “making their name known” because they’re well-known publications like Forbes and Business Insiders write about them.
Some famous clients include Robinhood, AXIOS, and Flexport.
The target expense, “cost per acquisition”, is $600,000 / month. Their strategy is to cut costs so they can increase revenue. Carta’s strategy is to decrease costs so they can grow revenue. They’ve decided to cut costs by two-thirds over a two-year span and make money by 2019.
The plan above was originally published by the company in 2015 but has since gone un-updated. It’s therefore difficult to say whether or not the burn rates were actually achieved. However, readers can draw their own conclusions about that point.
Carta has ambitions to become a marketplace for private marketplaces. One of the features they push hard on their site is Carta X.
Carta X says it’s a “trader” not just a “trader”. It claims to be able to connect traders with institutional investors.
Moreover, they regulate themselves and provide compliance for other regulatory agencies. Because there is no sponsorship involved, the trades do not require any paperwork. As with all of its other capabilities, cap tables are available at no cost.
How Does Carta Make Money?
Carta is a financial management tool for entrepreneurs and small business owners. It lets them keep track of their finances, including cap tables, valuables, investments, and stock options.
There has been a lot written about them. If you aren’t familiar with them, they’re used for funding startups and privately held corporations.
Suppose a startup wants to raise $1 million from investors. If one potential backer buys 10 percent of the business for $100,000 and another potential backer buys five percent of the business for 50,000 dollars, everything is fine if there are no additional investments.
If there are multiple rounds of funding, things can become quite complicated.
Let us assume that after one full fiscal cycle (one complete financial period), the company has some good revenue and decides to double its value from $2 million to $4 million. The first two shareholders now own a combined total worth of $3 million.
The company decides to raise another $500,000 from investors and has the new funding valued at $1 million based on the valuation. With the previous investors owning 20%, the new investors owning 40%.
It sounds pretty good until round three when the startup is worth $10 million. At this point, the cofounding team sells another 10 percent of their shares for $1 million to two new investors who pay them $500K each.
Each round three investors own the same amount of the business as the round one investment which cost $50,000 but they’re each paying 100 times what the round one investment costed.
Each of them is paying 50 times what the previous round investors were paying for their shares. Even though they each only own one-fifth of what the previous round investors owned, they’re each paying 50 times what they would’ve been paying if they’d just invested in the round before.
If an experienced investment professional shows up late to the party, he may be feeling slightly undervalued by his peers.
To alleviate these concerns, the best strategy is to be transparent and share your calculations and reasoning for both your numbers and your valuation.
It looks simple because we’re using round figures for our investments and there are only three rounds.
But even if you’re working with ten or more investment rounds with fifty or more investment partners, things can become quite complicated.
On top of that, instead of using round numbers, you’re calculating more precise stake sizes and valuations, which means there’s a lot more possibility for misunderstandings and miscalculations, and angry investors.
A digital version of a company’s financial statements makes it easier to keep track of who owns what percentage of the business.
It may seem strange for a company like Carta to be so successful by using what would seem to most people as nothing more than a glorification of spreadsheets, but it isn’t just about calculations and displays. It’s about the actual presentation to potential investors.
Remember, startups and small companies need to reassure their investors that even though they’ve lost some money now, they’re going to be profitable later. They don’t want to lose their investors’ trust.
Investors who were already angry at previous valuations could also be upset by new valuations that have grown exponentially from earlier rounds.
Fortunately, Carta has also prepared valuations for clients who want to use their services, so they can see just how well those valuations are justified.
Liquidity and Carta X
Beyond just providing financial statements and other services for startups, private companies, and venture capitalists, Carta aims to be an exchange for the private company through its Carta X feature.
Because Carta X has great promise as an entirely new type of financial instrument, this too could be a potential revenue source for Goldman Sachs.
Liquidity refers to the fact that an asset has value because there are people willing to buy it at any given time. As far as investors go, liquidity refers to the fact that they can sell their investments whenever they want.
It would seem easy enough if we were talking about a NASDAQ stock, but it can get more complicated when we’re talking about shares of a startup or private company (e.g., a share of Facebook).
Even though there may be an increase in the value of a company in which an investor buys some shares, what are they worth if the owner cannot sell them for any reason?
Because Carta X uses an advanced software program designed specifically for finding liquidity within a specific marketplace, Carta X claims that it doesn’t have any trouble finding liquidity for its clients.
Since 2015, Carta’s value has risen by nine times.
It has gone up by nearly 300% since it started out at $0.25 per share in January 2017.
Is Carta Profitable?
On the surface, Carta appears to be doing great. In reality, though, things aren’t quite what they seem. The company’s revenue has grown by nearly 100 percent over the past two years. However, the company’s profit margin is shrinking rapidly. Moreover, the company s stock price has dropped by almost half during the same timeframe. These trends suggest that the company might not be able to continue growing at its current pace.
Carta is not generating profits yet because its core business of selling software has been losing money for years. However, as Carta continues to grow, the firm anticipates becoming consistently profitable.
According to The Information (and another source), a person close to the firm stated that Carta is not making any profit. Furthermore, the revenue, currently at approximately $150 million, is increasing at only a fraction of its current valuation. This implies that new investors have purchased 46 times that revenue, proportionally, in an attempt to purchase stock.
It doesn’t release any financial figures, so there’s no way to know exactly how profitable it is.
Carta was referred to in February of 2020 by The Hustle as an early-stage company. Since it was founded back in 2012, that means it’s been an early-stage company for almost 10+ years.
Conclusion: How Does Carta Make Money?
It was quite an experience for us to dive into Carta’s business and learn its unique monetization strategy. Although the company is fairly new, it already has a large customer pool and a pretty successful business plan.
Many of the customers who have used the system seem to be really satisfied with it, as they’ve fully integrated it into their daily routines for handling different types of data.
You can always go to the Carta website to find out more about its products or take a free test drive to see whether this solution suits your business requirements.
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Please feel free to contact us if you have any comments, questions, or insights regarding our business plan. We would love to discuss them with you.
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