September 30, 2018

JF1489: Learn About A New Marketplace You May Have Never Heard Of #SkillSetSunday with Dave Dunford

Dave is on the show today to tell us about a different area of investing, not real estate.We’re actually going to hear about buying shares in private companies and why as entrepreneurs, we should care. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Dave Dunford Real Estate Background:

  • Managing director at Zanbato, an SEC registered trading platform
  • Helps registered personnel, investors, and sellers come to find counterparties and trade institutionally-sized blocks of private securities.
  • Before Zanbato, he was an olympic swimmer
  • Say hi to him at
  • Based in San Francisco, CA

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Joe Fairless: Best ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Sunday, we’ve got a special segment called Skillset Sunday. By the end of this conversation I’m betting that you’re going to have acquired a new skill, or honed an existing skill that you’ve got even better. That skill is the skill of learning about a marketplace that perhaps you didn’t know existed.

With us today, we’re talking to Dave Dunford. He’s the managing director at Zanbato, which is an SEC-registered trading platform. How are you doing, Dave?

Dave Dunford: Hey, Joe. I’m doing very well. How are you doing?

Joe Fairless: I’m doing well as well, and nice to have you on the show. A little bit more about Dave – he helps registered professional investors and sellers come find counterparties and trade institutional-sized blocks of private securities. He’s gonna make it all English here in a little bit. That might sound a little confusing, but basically — well, you know what, I’m not gonna steal his thunder; he’s gonna tell us what he does. Before Zanbato, he was an Olympic swimmer (there’s a fun fact) and he’s based in San Francisco, California.

With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dave Dunford: Absolutely. And first off, it’s great to be on this show, and I’m very appreciative to have the opportunity to discuss this with your listeners, because I think some of what I’ll say might resonate, even though it’s in a completely different segment of a different market.

Zanbato – I think you said it, we are a trading platform for private company securities, and we do work on the larger end of the spectrum. We’re talking about tens of millions of dollars sized blocks of private companies, that sellers come to us to try and sell, and we have investors on the other side trying to purchase interests in private companies.

I’m happy to go into a bit of a background as to how this market has emerged and why it’s growing, if that would be helpful.

Joe Fairless: Yes, please do.

Dave Dunford: Absolutely. So this is a relatively new phenomenon, having an active trading market in private companies… Because historically, when a company got large enough such that it was eliciting a lot of investor interest, where sellers had large enough blocks where they were really actively looking for liquidity, the company would already be public; that’s really been largely historically a function of public markets here in the U.S. But around about 1997, which is when the number of public companies in the U.S. peaked, things started to turn… And it’s hard to pinpoint one thing in particular, but a lot of it was to do with regulation.

A lot of the regulation that was being imposed on public companies was actually increasing the liability and making it more onerous for executives of public companies, therefore swinging the pendulum a little bit from running a private company and the benefits versus risks there, and being a public company… All the while, a lot of the regulation that was being pushed was leading to the reduction in the amount of money that banks could make trading stocks in public markets. Bankers who would traditionally make a lot of money transacting, because of the advent on computers and the introduction of decimalization of share prices and therefore the inability for bankers to make as much money brokering and trading stocks – which from some perspective that’s a good thing, but from one very important perspective for this conversation, what it did was it reduced the ability for banks to invest in a lot of the services which make public companies more liquid…

So a lot of the sales, a lot of research, a lot of the investment they’d make themselves in public companies, and what that led to was lower liquidity in especially the smaller, less-known public companies, and therefore the benefit of being public started to reduce dramatically, and the downsides of being public started to increase… And therefore it’s led up to this point in private companies wanting to stay private longer and longer, where private markets continue to grow, investors start now moving into private markets, and looking at private markets when they wouldn’t have historically…

So what we’ve seen is private companies staying private longer and longer, and getting larger and larger in private markets, and therefore the need for infrastructure to support transacting private markets where historically it wouldn’t have been necessary.

Joe Fairless: So this is for the — not exclusively, but this really helps the administrative assistant at a private company like Uber or another company like that, who is making maybe 50k/year, but on paper is a multi-millionaire, because they got in the company early on… So he/she has the ability through your platform to sell some of the shares that they own in their private company, in this example Uber, and cash in on some of that, so they can actually realize some of those ownership shares, versus just being on-paper millionaires. Is that accurate?

Dave Dunford: Sure, that’s definitely a part of the market right now. It’s employees that have worked at these companies for a number of years, and early on being underpaid, but have been compensated a lot in equity, and they’ve been there a number of years and are looking to move on in their lives, buy a house, make some sort of other investment, they just don’t have the cash. They have all this equity, so they need a way to get some liquidity, and it just doesn’t look like their company is gonna be public any time soon or be acquired any time soon. So that’s definitely a huge important part of all of this.

Then another interesting part of this is the venture capital firms that invested in these companies. Traditionally, the way the venture capital model is set up is these funds have a ten-year timeframe, which used to work really well. Back about 20 years ago the average time for a company, from its first funding round to IPO, was around five years. When you’re operating with a ten-year fund, that’s a great timeframe; you invest in the early years of the fund, and then in the latter years of the fund you’re harvesting, you’re getting your money back.

Now the average time from a company’s first round of financing to IPO is around the 10-11 year mark, so it doesn’t work so well for the typical venture capital model, where they’ve invested and by the time the fund is expiring, their liquidity is nowhere in sight, so now they’re starting to have to look at other alternatives for getting money back to their end investors, that obviously invested in the hopes of getting a return at some point in the future.

Joe Fairless: Before we started recording I asked you – which I shouldn’t have, because I should always leave the questions for during the recording… So that was a rookie mistake on my part, but we’ll reenact what I’ve asked you before – I had asked you before we started recording if you only work with accredited investors, and you said what?

Dave Dunford: I said — so this market is only really accessible for accredited investors. We’ve actually set our criteria a little bit stricter than that, and we really only work with qualified purchasers; that’s the five million dollar threshold, rather than the one million dollar threshold. And that’s just more a symptom of our focus in this market, it’s more on the larger end of the spectrum. We’re serving a lot of the institutions that require our services, and then obviously wealthy individuals can fall into that category. However, it is a very interesting market, even at the accredited investor level; we’re just not as a company as focused on that.

Joe Fairless: Qualified purchasers – I didn’t know that term existed, and that’s my ignorance for having a background in advertising agencies, and kind of learning real estate through what I’m doing and also the podcast… So I’m just curious, is there another level up, of a group of individuals above qualified purchasers?

Dave Dunford: From a regulatory perspective, it’s not as meaningful, but from a sort of categorization perspective, you get into the high net worth, and then ultra high net worth… And I think there are different definitions of that, but then you’re looking in the vast quantities of money.

Joe Fairless: Got it. I always thought high net worth was accredited, for how it’s defined maybe more officially… What’s high net worth defined as?

Dave Dunford: I don’t have an exact number, but I think you’re looking at tens of millions.

Joe Fairless: Okay. So how do you make money? We’ll start with that.

Dave Dunford: We operate under an exchange model. We have a platform called ZX, and we collect buy and sell orders on private company shares. We operate on an agency basis, so we collect a transaction fee for any successfully completed transaction. A buyer will come in with a price and size in mind, and the same thing on the sell side, and if that transaction is possible, we’ll facilitate it and we’ll facilitate the execution, and then be paid from either side a transaction fee, completing the transaction.

Joe Fairless: You mentioned earlier that if an individual has ownership equity in a private company that doesn’t look like they’ll be sold any time soon, then they might wanna liquidate and sell via this marketplace… So I get that standpoint from their perspective, for why they’re selling, but why would anyone want to buy equity in a company if it doesn’t look like it’s gonna be sold anytime soon?

Dave Dunford: That’s a really interesting question, and a really important question for this market. I can actually use an example to illustrate this coin. Historically, to receive basically appreciation, or achieve the appreciation in a company’s stock, an average wealthy investor could have just waited till the IPO, got in at the IPO, and there was a good probability that you can receive really meaningful, outsized returns in the public markets, and that’s becoming increasingly less likely.

So to really achieve huge outsized returns, a lot of wealthy investors or institutions are really being forced to look at private companies before they’ve got to such a large scale as a private company that by the time they go out and IPO it really is too late to receive the double, triple, quadruple digit returns. So the example that I give here is if you look at a company like Amazon in 1997 when it IPO-ed, it was just over 438 million dollars [unintelligible [00:14:06].27] Looking at it right now, it’s at the 800-900 billion dollar valuation mark. So as an investor who had invested purely in the public markets at the IPO, you’ve received a 2000x return on that investment.

Fast-forward a decade and a half to when Facebook went public, at the time that Facebook was going public, it was already a 100 billion dollar company. So now even if you invested in that IPO, you’ve done fantastically well, but it’s not even in the same ballpark of what it would have been like for a comparable company in sort of the last generation. Facebook, a 100 billion dollar company is now at 600, so you 6x-ed… That’s a great return, but it’s not even comparable.

So if you look at a lot of big private companies now, they’ve already got very healthy valuations. That’s not to say that they won’t continue to grow as public companies, but the scale or the multiples at which they can grow at are a lot more limited.

Joe Fairless: The two target audiences that are most valuable to you – and I’m guessing based on what you’ve told me, but please clarify if this isn’t accurate – is one, qualified purchasers, so people who have five million dollar net worth, and I’m guessing that’s not including primary residence, just like it is accredited… And then also on the flipside, people who have equity ownership in private companies. Are those your two primary audiences?

Dave Dunford: They are, along with the institutions that are participating in this space – the venture funds, the hedge funds, the bigger investors that would have large positions by virtue of investing early, or the ones that are looking to come in at a later stage and purchase some of these shares.

Joe Fairless: So how do you focus your time between those three groups?

Dave Dunford: That’s a great question. It’s more company-specific – particular companies you see a difference with trends and trading activity… But it’s more if you have the ability to participate, if you have actively participated, obviously you’re on one side of the spectrum, and then if you’re just looking to get involved in this space, what I’d say is obviously there’s a lot to learn, securities are risky securities… That’s part of the reason why we’re cautious going down to the accredited investor level – for people participating in this space, investing in private companies, we just wanna be very sure that it’s a suitable thing for that person to do, and in some cases it is, but we obviously like to operate with the utmost caution in that regard.

Joe Fairless: Because it’s higher risk, but higher potential return, right?

Dave Dunford: Exactly. There are risks, obvious ones like an illiquidity risk, but then other less obvious ones. For example, information is less available in private companies and public companies, so often you just don’t know what you don’t know. So there are just risks that people need to be aware of when choosing to invest in these private companies, and obviously it is really important to understand that before taking the plunge.

Joe Fairless: Anything else as it relates to what you do in your company that we haven’t talked about that you think we should?

Dave Dunford: I think we covered a good portion, as long as you think it’s clear the reason why this market exists. The reason why we think it will continue to grow, I can elaborate on. We think it’ll continue to grow because of a lot of the regulatory trends that have caused this market to be where it is right now we don’t see being rolled back. We think it makes sense where the market is right now for private companies to raise a ton of capital in the private markets and stay private as long as possible… And we really think that what we’re doing is important because any mature securities market really does have a lot of infrastructure to standardize processes for transacting on a secondary market… And the private companies securities market doesn’t really have that much in place, and that’s really what we’re trying to achieve – set up some of the infrastructure that exists in other markets to make this market as orderly as possible.

Joe Fairless: What’s the minimum investment.

Dave Dunford: We don’t have a minimum investment.

Joe Fairless: Five dollars?

Dave Dunford: [laughs] One thing that I’ve mentioned is the transfer process for companies varies from company to company, but often there is a processing fee imposed by a company that does make it prohibitive to make small investments, and that’s a company’s way of regulating their market to some degree.

For example, some companies will say “We’ll help you transfer shares, but the transfer fee is $5,000.” Obviously, if you’re investing $10,000 it might be prohibitive. So you’re looking at sort of the hundred thousand dollar plus threshold. For us, really the vast majority of our transactions are in the millions.

Joe Fairless: What would you say the average is, if you had to guess?

Dave Dunford: The average block size is in the four million range.

Joe Fairless: Four million range… And this is with a qualified purchaser who has a five million dollar net worth or above, and this is in a private company that they’re investing in, where you said the information tends to be less available than a public – it makes sense – so what type of questions do they ask prior to plunking down four million bucks into this?

Dave Dunford: Well, the reason why that number is high is  a lot of purchases are being made through–

Joe Fairless: Institutional…

Dave Dunford: It’s institutional, so they do have existing information on the company by virtue of already being a holder, or having invested in a venture fund and having exposure to that company, and therefore having enough information to have an opinion on the company.

And then some of the larger companies do start selectively disclosing some of their metrics publicly, so it’s not the sort of disclosure that’s required in public markets, for example for audited financial statements… But it’s enough to really help people form an opinion.

I think a lot of investors, the reason they come in and invest in some of these companies is to get exposure to certain spaces that they believe in, that it’s impossible if you’re trying to invest in public markets. For example ride sharing right now – there isn’t a public ride sharing company, but if you’re really bullish on this space and you think one company in particular is dominating and will continue to dominate, then you have to really look at how you would invest through a private company.

Joe Fairless: How can the Best Ever listeners get in touch with you or learn more about your company? Where should they go?

Dave Dunford: Go to our website, There should be a Contact Us button, and please do put in the comment section that you heard about us through your podcast.

I would just add to that that even if you’re accredited investor level and you’re curious, we’re more than happy to answer questions. My team can help refer you to resources that would be helpful, beyond this podcast.

Joe Fairless: Yeah, and I know first-hand making the first million is much harder than making the next million… So accredited investors who are listening, I’m sure you would agree that your first million was pretty darn challenging, and if you’re in between one and five, you’re likely gonna be trending towards five… So you’re probably gonna be in the qualified purchaser category if you’re not in there already. I’m sure there’s a lot of qualified purchasers, or almost qualified purchasers who are listening to the podcast, and probably didn’t know they were categorized as a qualified purchaser, like myself; I had no idea that category exists, but that’s just my ignorance, and that’s why I do this podcast, so I can be educated by people like you.

Thank you so much, Dave, for being on the show and talking about this marketplace. It’s not real estate specific, but real estate deals with money and investors, and you are dealing with money and investors, and you’re dealing with a lot of money and people who have five million plus net worth, and it’s important and necessary for us to know what they’re looking at, what other options they have, so that we can then be more educated when we speak to them about what we’re offering.

Thank you so much for being on the show, Dave. I hope you have a best ever weekend, and we’ll talk to you soon.

Dave Dunford: I appreciate it. Thanks for having me, Joe.


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