Carta CEO Henry Ward on Private Credit & Private Markets

26:58It appears that you've scaled from a little niche solution to a giant platform for private companies. What was the biggest growth pains in scaling that up? It's all of them. Scaling a company, I think I love Jensen at NVIDIA, and I got to see him speak, and someone asked him about, would he do it again? and he's one of the most successful entrepreneurs of our generation. And he goes, if I knew what it would take, I wouldn't have done it again. Really? Yeah. And, you know, it's, I think Mark Andreessen calls it, it's eating glass until you enjoy the taste of your own blood. So it's, you know, every day, there's sort of this funny thing where people are like, well, what was it like to scale?

27:46And I'm like, I'm still doing it. Like, you know, and it's, you know, Getting in at 10 o 'clock last night from a 4 a.m. start, it's talking to customers, it's hiring, firing, uncomfortable conversations, board mechanics. It's all the same. It's just more harder, faster. Is Andreessen's quote, eating glass till you like the taste of your own blood, is that accurate or is it a little hyperbolic? You know, I think, so I talk a lot to founders about this where the founders that want to be founders for the money, we all know that the expected value of being an entrepreneur is below pursuing a career.

28:27Far, far below. The better business people actually. Well, such a large percentage fail out of the gate. So, all the survivorship bias of we see the ones that have succeeded, that's just the top of the iceberg. You don't see everything below the waterline. A hundred percent. And then when you see the ones that succeeded, sort of by definition, the ones that succeeded made it look easy, right? Because it's like we're on podcasts doing all of these things. They found the right niche. They pivoted appropriately. They built what was needed and the market rewarded them. That's exactly right. How hard could it be?

28:57That's exactly right. And when I look at my history, I know how lucky I got. Like there's so many forks in the road that, boy, if I had flipped heads instead of tails, I would not be here. And I had to flip, you know, I had to flip tails 32 times in a row to get to where I am. Let me interrupt you a second because I just have to share this. So I've done 550, 600 of these. And I have heard that exact thing over and over again. And the first couple of times I heard it, especially from billionaires, I'm like, yeah, yeah, false humility. But then when I start hearing it from more people, from guys like you who are in the trenches chewing on glass, it's like – and my own experience as an entrepreneur, you really – smart and hard work is just table stakes.

29:46You really have to get lucky and people don't understand the role of serendipity in how things work out. One of my favorite other quotes is Bo Durham, the comedian, said, you know, don't take advice from successful people. Because it's like listening to Taylor Swift say, follow your dreams. Or the lottery winner goes, you know what you should do? Sell everything you own and buy lottery tickets. That's right. That's an XKCD. They told me I would never win, but I kept at it. That's right. Here I am today. Exactly. No, it's 100 % true. Listen, there's so much more signal in the failures than there are in the successes because success, maybe it was skill, maybe it was luck.

30:27We don't know. Yeah. And what I try to coach like in my angel investments is I call it, you know, the love of the game. And so, you know, you see founders that I want to be successful. I want to be a successful founder. I want to make the money. You know, and what I always tell them is like, hey, the problem with money, doing this for the money is most of your journey, if not all, you're poor. You're seed stage, early stage. You're just poor. And so if you're doing it for the money, you kind of quickly lose motivation because you're poor for years. Right. And then let's say you're one of the lucky few to get successful.

31:00Well, now you're rich. And so if you do it for the money, now you have no reason to do it anymore because you've got the money. And the people that are successful over time in this business do it for the love of the game. Like I do it because I love chewing glass. You know, my wife and I were having a conversation the other day about when we were poor, and I mean really poor, and the really challenging thing is when you're in the thick of it, you don't know that it's going to work out. You have no idea, hey, am I going to get that lucky break? Is the right client, partner, customer going to come along and give me that critical mass to go to the next level?

31:40So not only are you poor, but the outcome is wholly unknown. And so if you don't love it, then what are you doing? That's right. You're poor and you're living in constant uncertainty. Uncertainty, absolutely. And I think what people forget is, you know, I'm not poor anymore, but I still live in uncertainty. And, you know, I don't know what's going to happen. You know, I'm trying to build a bigger business, you know, and the watermark keeps going up. And so, like, if in three years the watermark isn't higher, I will feel like I failed the last three years. And I think that's the essence of being an entrepreneur is the watermark keeps going up and you keep going up.

32:18Really quite fascinating. I want to dive into the world of private companies and alts. But before we do that, I just had to ask you a data question. My assumption is accessing reliable and clean data has to be the lifeblood of what you're doing. How challenging is that? How many different inputs do you guys have to track at Carta? I have a perspective on software and data businesses that might be a bit provocative, which is I'll make this statement that software businesses cannot be data businesses. And the reason is if a software business has customer data, they get that customer data by selling software and service to this customer.

33:03and if they monetize that data on the other side, if their left hand is, we will keep your data confidential and as part of our software service to you, but then with the right hand, they're selling that data, it cannibalizes their software business because the customers won't trust them now because they're now giving them their data, which is why Carta does not have a data product. We have tons of data. We do not have a monetizable data product. Interesting. We only sell workflow or business operations software. It's hard to think of a business that sells actual software and also sells data. I can't think of any.

33:44Even Bloomberg started really as a data business. The non-existence of something is not proof that it cannot exist. But my best example of why my theory that software businesses and data businesses cannot coexist in one company is Salesforce. If anybody would launch a data product, it would be Salesforce. And in 30 years, they have not. And I don't think they ever will. And I think the day Salesforce launches a successful data business, I will be eating my words and I will be wrong. But I don't think software businesses can become data businesses. I would imagine that. So we use, in my shop, we use Salesforce as our CRM.

34:23very customizable and they have specific industries that they they market towards and customize but the moment it feels like your data is being reused every single one of their competitors would say we keep your data safe we don't monetize the data give them up on them come to us where we respect privacy i mean i think the moment anybody tries that their competition is all over and you would agree because suddenly you're now on every list of every vendor trying to sell software to Barry and they know everything about you because Salesforce gave them your data. Not only that, but it's not quite HIPAA, but the SEC has privacy requirements, things you're not allowed to share when you're supposed to know your client, you have all this data.

35:08And if one of your vendors is reusing that, repurposing that data for their own ends, like, wait, not only are you violating our privacy agreement, you're putting me underwater with the SEC. They may come yell at me. I don't need that. I'm going to go to your competition. Kind of interesting. So let's pivot towards the private markets because it's so interesting. You've testified before Congress that startups and growth companies backed by private capital, that's where most of the new job growth comes in the United States. Explain. Yeah. You know, public markets is actually a shrinking industry.

35:49You know, there's fewer public companies today than there were 10 years ago by quite a big margin. But the number of private companies is growing astronomically. And that's largely fueled by there's a lot more private capital than there used to be to fund these businesses. And there's less reasons to go public now. So I think that will continue to be true. I think it's structurally true. When I go to the Hill and talk to our legislators, the common response is, well, we just have to push more companies to go public. I think it's... Their belief is the public markets is a great product for everyday Americans to access growth equity.

36:32And I think they're right. It is a good product for it. The problem is it's not, it's a shrinking product and most of the growth is happening in the private markets and their attempts to get these companies to go public so that there can be retail access to them is isn't working. It's a little bit like, you know, the river's coming and you've got like one tiny little dam trying to hold the water back. Let me share a data point that I bet a lot of listeners are not familiar with. The U.S. is something like four to five percent of the global population, where something like twenty four, twenty five percent of the global economy, global market cap, We're over half.

37:08I mean, we are wildly disproportionate in our public markets. How much bigger does Congress want to make that? I mean, what you're describing makes a lot of sense. The public markets are enormous. Let's let the private markets grow and see where they go. Yeah, and that's certainly the message that we're pushing. We still have to solve the problem of retail access because as the number of public companies is shrinking, that's less and less options for your everyday American to invest their money in their retirement. I don't think the answer is to try to push more companies to go public. I think the answer is to create safe access for everyday Americans into private capital.

37:49And that's what we spend a lot of time lobbying for in Congress. Really quite fascinating. Coming up, we continue our conversation with Henry Ward, CEO and co-founder of Carter, talking about the rise of private company investing. I'm Barry Ritholtz. You're listening to Masters of Business on Bloomberg Radio.

38:22I'm Barry Redultz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Henry Ward. He's the CEO and co-founder of Carta. They help manage the cap tables for tens of thousands of private companies, thousands of investment firms, and millions of equity holders. They do a number of other things in terms of tracking compensation, valuation, liquidity, all these really fascinating issues. So there are a number of companies that bring liquidity to private companies. Sometimes it's private equity or some form of a private fund. Other times it's individuals who want to participate in companies before they go public.

39:07What are your thoughts on the future of secondary liquidity, both for the investors and employees of startups and for the rest of the investing public that wants to participate in these privates? Yeah, so I think I'm one of the maybe top five people in the world that have worked on private market liquidity. I spent the last 10 years working on the problem. And I'm of the view now that at least venture startup liquidity will never happen. And at least a secondary exchange in the sense that we think of public market exchanges. Private markets are so different from public. It's really kind of the upside down world.

39:50In public markets, the price is set by the last buyer, not the first. In private markets, it's set by the first and not the last. In public markets, it's easier to sell one share than$100 million worth of shares. In private markets, it's easier to sell a$100 million block than it is to sell one share. In public markets, the distribution outcomes is mostly Gaussian, normally distributed. In private markets, it's power law. So all the math that exists in modern portfolio finance theory in public markets doesn't work in private. So it's just it's a very different market infrastructure. I think all the attempts to try to create liquidity in the venture world will be failed attempts.

40:31But I hope I'm wrong. I hope I'm just the old. I mean, Equity Zen seems to have figured this out a while ago. They seem to have put together a way to do secondaries for creating some liquidity for for insiders or employees at companies. But it's not like they're a trillion dollar platform. It's it's a little bit of a niche specific focused. And there are other companies like that. I just happen to be thinking of them recently. But really, what you're saying is there's a gulf between trillions and trillions of dollars in public equity and private stock and never the twain shall meet. So in public markets, liquidity begets liquidity.

41:15And so it centralizes on two exchanges in the U.S. In most regions, it centralizes on one. In private markets, what's happened is there's equities and there's many others. There's many, many small niche businesses doing secondaries. It does happen. But liquidity does not beget liquidity. As soon as one of these companies starts to scale, all the competitors come around and they devolve back down to a niche business. And that's just the market structure, is that any company that actually starts to scale in the private markets, it actually degenerates. We've seen so many examples of private market liquidity providers come in hot, get really a quick start, and then once they hit scale, it falls down.

42:03And so you see so many of these small businesses that will always stay small businesses. I don't think there's an opportunity for someone to consolidate the market. There's been so much focus on privates and alternatives. Does this intensity of interest, does this surprise you at all? Or you've been up to your chin in this for a decade and what took everybody so long? We've been in this up to my chin, as you say, for a decade plus. So it's not surprising. What I think is really, we're in a moment of time in the speed that it's happening, especially with the current administration. We're liberalizing a lot of the rules for private market access.

42:42You know, there's a lot of work being done around, can retail investors access private equity firms, private credit firms? I think that will continue to happen, and I think that's a big tailwind for Carta. and I think the U.S. economy and GDP, because so much of this capital is being now deployed in useful ways. I think that will continue to be true in the next administration. Hopefully they will continue that legislative policy. I think it will be weird in 20 or 30 years. It will be weird that we locked out 99 percent of Americans out of private capital. So when I look at who's being aggressive in terms of moving from how do we get more people onto the alternatives and private side, it's everyone from Blackstone to BlackRock, Carlisle, Apollo, Goldman Sachs.

43:35Go down the list. I'm assuming you're working with some or most of these companies. We know them all. We're huge fans. I was lucky enough to spend an hour with Rob Goldstein, the COO over at BlackRock, and he was telling me kind of the vision of BlackRock and their perspective on private markets. And he made this very salient point, which was when they talk to their customers, they might look at a customer and they spend$25 million a year on public market infrastructure and technology for their public market asset allocation software. And they might spend$350 ,000 on their private market stuff.

44:21A fraction. A fraction, right? With BlackRock. But they might spend a million dollars total. So$350K is with BlackRock and$700K is with a bunch of other vendors. And his team is like, oh, we should go after that$700K and we'll win the whole million dollars that they send in alts. And he goes, no, no, no, no. What we need to do is figure out how to get that million dollars a year they spend in alts to be$25 million a year. And then we'll capture half of that. And that was the mental mind shift that I think BlackRock is so smart at, which is we're trying to grow the market. not our percentage of the market.

44:57Right. That makes a whole lot of sense. So they're looking at an adjacent market to their public market dominance. They're the biggest investment firm in the world at around$12 trillion. How do you decide what adjacent markets are attractive and you might want to enter them? If you started with cap tables, you're doing all sorts of other data analytics. How do you figure out what's adjacent? We have a really strict framework on it because we spend a lot of our time thinking about where we can expand. And we have really two criteria. So one is, do we have a right to win? So what gives us competitive edge that we can do that nobody else can do?

45:38And second is, can we win that market quickly? Because we're very much a software business. If you can win a market, but it takes a long time, we're a growth company. So it's got to be fast. So you have to have a very aggressive customer acquisition model that creates a flywheel that the more customers you get, the more customers you get. And so if those two things are true, we'll go after it. And it leads you to really funny things where you wouldn't actually attack adjacent markets that have obvious adjacency. So the example I love is CapTables and 49A. CapTables was a legal service when we entered it, done by lawyers.

46:1549A Valuations was a valuation service done by valuation providers. nobody thought of them as similar. What we realized is by having the cap table, we could do valuations faster, cheaper, smarter. And so we just started doing valuations. Well, you know the total number of shareholders. You know what the last transaction or funding was. It sounds pretty basic math, right? Totally. It's just math on the cap table, but they're a completely different industry. So if you think about it from a market perspective, they're different, but you think about it from where we have competitive edge, they're the same.

46:44And the same with fund accounting. Fund administration, fund accounting software, We're a very different industry than cap table management, but we're able to connect the cap tables to the funds, and that gave us unique competitive advantage that nobody else could do. And so now we're in the fund admin business, and that's our second biggest business line. You guys also do compensation analytics. How did you find your way into that space? We realized we're the only ones that could do benchmarking for both salary and equity for startups. Oh, of course. Nobody else can do it. Without the equity, the salary may not be that significant.

47:16That's right. But to start at a priority and go, we're going to do cap tables and that's going to lead us into compensation, didn't make a ton of sense. And we have a flywheel of this is how we enter these industries. You're the perfect person to ask this question. I'm going to go off script. So I spoke at an event in June in Silicon Valley. It was a kind of funky hotel that was turned into this really interesting space right on the edge of trying to remember exactly where it was, about 45 minutes outside of San Francisco. But anyway, it was an employee benefits conference with all sorts of people.

47:56And I was there to talk about my book at the time. And I heard over and over again from all these people who they're 401k people, they're employee compensation consultants, they're health benefit consultants, all these people who were telling me that there's this sort of misalignment amongst Silicon Valley employees who are more interested in the dollars than they are in the equity, which just completely sounds upside down to me. Am I just looking at a weird corner of the world or is that a thing that, hey, you can't pay your rent with equity. I have to at least make X. What do you see out there in terms of how startup employees are thinking about equity versus cash payments for comp?

48:47Yeah, we've spent a lot of time thinking about this. And I'll frame it as wealth management, financial advice is a well-established industry in the public world. and I'll call it the liquid world, right? You pay 1 % or half a percent of AUM to your financial advisor and they help you manage your assets. There is no equivalent in the private world. Like if I'm an employee and I make$150 ,000 a year in cash, but I'm sitting on a million or$2 million of equity, illiquid equity, how do I think about that? How do I work on it? And there is no industry for that. The financial advisors don't know how to work with that in part because they don't understand the private market, you know, illiquid asset piece.

49:31But also, they don't have any way to monetize$2 million worth of private stock. You can't, you know, you can't charge one basis point or percent of AUM on it. And so we've wrestled with this question of if an industry were to be created, not wealth managed, but wealth management for illiquid people, for high net worth but illiquid asset holders, what would that industry look like? And so we've been thinking a lot about that problem. And we recently launched a partnership with Morgan Stanley where last year we posed this problem to them. And we said, hey, we think it's worth solving wealth management for illiquid holders.

50:14How would we do that? And they're the largest wealth management firm in the country. They do this extremely well. And now we're creating a motion to basically help these employees who are like, I would just want the cash because I don't know what to do with this equity. I don't understand it. I don't know when it's going to be liquid. And can you create a financial advisory industry to help those people? That's really fascinating. I was genuinely shocked, maybe because I'm I'm more risk seeking than risk averse. And the thought of equity is so, you know, attractive to me. But I guess when you're in the thick of it and you're grinding 100 hour weeks, hey, I'm working my butt off and I still have to worry about paying my rent.

50:52I don't want to go that way. That was the only explanation I could come up with. But it was it was really quite fascinating. I only have you for a limited amount of time. Why don't we jump to some of our favorite questions that we ask all of our guests starting with. And you're a good person to ask this. Tell us about your mentors who helped shape your career. uh yeah i i don't think i've had just one i i think um i pulled together a lot of people that have that helped me with little different things and so you know everything from my boxing coach in high school and college that that you know boxing is an interesting sport because it's one of the very few sports that um if you're tired and you're in pain and you have to let off the gas a little bit it hurts more not less uh and you gotta dig deep that's right and um uh you know It's literally in the corner.

51:46And from Perseverance, from him, from the Marines, from Mark Andreessen, who helped me figure out NetSuite, what we call ERP for private capital, at a breakfast. To John Waldron, who I got to have a lunch with him, who's the president at Goldman, who explained to me why bankers make more money than I do. And it's because of the regulatory defensibility. And so you just pick up these nuggets from these very smart people and you hold them as a treasure trove. Let's talk about books. What are some of your favorites? Are you reading anything currently? We just read Amp It Up as a leadership team. So last month we took 60 of our top leaders at Carta on an offsite.

52:32And every time we do an offsite at Carta, we pick a book to read and everybody has to read it. And we do a discussion group. And it was very timely for us. We're in very much an acceleration motion. And so everybody at Carter right now is reading Amp It Up and talking about it. Really interesting. What about streaming? What are you listening to in terms of podcasts or watching on Netflix or Amazon? I kind of get the sense you're not a big couch potato kind of guy. I'm not. I don't really watch TV except I have an 11-year-old boy, and I recently got him into Arrested Development, which is a classic.

53:07Absolutely. some of the best comedy ever done. And we're watching it together and we're loving it. And now he hits me with the lines and, you know, Dad, I've made a huge mistake and we're having a great time with it. Narrator, it wasn't. Yeah. Right? I mean, that's where that comes from. People use it all the time, but it all goes right back to... I like his podcast, Smartless. It's kind of fun. Our final two questions. what sort of advice would you give to a recent college grad who is interested in a career in fill in the blank, entrepreneurship, startups, private companies? You know, I just did a talk at Waterloo yesterday to a bunch of soon-to-be grads there.

53:54And I said, you know, they were computer science grads. And I said, you know, they know of this algorithm called the hill climbing algorithm, them, which is basically if you're trying to find a global maximum versus a local maximum. What I mean by that, the analogy I use is let's say you're a French, you know, you're climbing in the French Alps as a mountain climber and you're trying to find the tallest mountain in the French Alps, but there's cloud cover. You can't see, you can't see the tops of these. How would you find the highest mountain? And you would, you would do it by picking a mountain, climbing to the top, recording how high you are, and then randomly jumping to another mountain and climbing and recording that.

54:29And there's all this math around, you know, how many random jumps to mountains do you have to have to have a 90 % probability of finding the global maximum? And I say it's a great analogy for metaphor for early careers, which is most of us, unfortunately, are taught you go through kindergarten to high school to college. You pick a career at 19 or a specialty. You then become a finance analyst and associate. Then you become a senior associate. it, then you become a man. And you just, you kind of walk this track and you, you never ask the question, am I on a local opt hill or a global optimal hill?

55:06And I encourage people early to, to jump mountains, uh, to figure out which, which mountain they want to be on. And I think one of the reasons many people my age are very unhappy in their careers is they look back and they realize, oh, I got to the top of the mountain, but it was the wrong mountain. Uh, and I encourage young people to mountain jump. I love that metaphor. Mountain jump is a great, great line. What do you know about the world of entrepreneurship, startups, etc. today? Might have been useful 20 or so years ago when you were first starting out. Idea matters. It matters a lot because I've had a lot of great ideas that did not work and I worked hard, hard at it.

55:46I also think there's this

55:52counterintuitive, I guess, thesis that's happening right now, which is the more entrepreneurs there are, the harder entrepreneurship gets. But people think the opposite, right? Oh, so many people are doing it. I can do too. Michael Mobuson calls that the paradox of skill. The more skillful players there are in sports, the more luck matters because everybody's playing at such a high level. 100%. And I think it's one of these funny things where not many people dream or move to Atlanta to be a 100-meter sprinter. Because I think I can be the greatest 100-meter sprinter in the world. And it's because there's not a lot of luck.

56:33I mean, there's luck around you don't get injured and all those things. But we pretty quickly can tell who's good and who's not good. That is a pure skill outcome. Yes. And it's a little bit like acting. Like so much of it is luck that because so much of it is luck, people think anybody can do it. And it's actually worse. You actually have to be a super skilled, you know, 100 meter sprinter. And you have to be lucky to do one of these startups. And I think a lot of people are like, oh, you know, a lot of it's luck. So if it's luck, anybody can do it. It's you got to have both. It makes it actually harder, not easier.

57:05I love the expression table stakes. Smart, hardworking. That's just to enter the arena. Then you got to get lucky on top of it. Right. Unbelievable. Henry, this has been absolutely fascinating. We have been speaking with Henry Ward. He is the CEO and co-founder of Carta, helping to manage much more than just the cap table for tens of thousands of companies, investment funds and investors. If you enjoy this conversation, well, check out any of the 565 we've done over the past 11 years. You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever you get your favorite podcast. And be sure to check out my new book, How Not to Invest, the ideas, numbers and behaviors that destroy wealth and how to avoid them.

57:58How Not to Invest at your favorite bookstore.

58:04Thank you.