Creating a $140B market: The secondary market masterclass - Larry Aschebrook [G Squared]

Larry Ashbrook, the founder of G-squared, revolutionized the secondary market for private company shares. He identified a significant unmet need: thousands of employees holding illiquid stock in pre-IPO companies, often representing life-changing wealth, with no clear path to liquidity. This realization led him to quit his stable university job in 2011 to establish G-squared, a fund dedicated to solving this problem. Initially, his venture was met with skepticism, as the secondary market was largely taboo, and companies perceived selling shares as a sign of failure. Today, G-squared manages $5 billion and has built a market now valued at $140 billion annually. Ashbrook's journey wasn't guided by a pre-existing master plan. In the early days, people considered him eccentric for leaving a decade-long career at the pinnacle of academia. His insight stemmed from observing how rapidly evolving companies, particularly those driven by smartphone technology, were fundamentally changing consumer behavior and creating immense value. He recognized an opportunity to participate in this value creation but underestimated the difficulty of accessing these private businesses. His success, he believes, was fueled by sheer persistence, a refusal to accept "no," and a beneficial naiveté. Had he fully understood the challenges ahead, he might never have started. The practicalities of making early investments in companies like Uber and Twitter in 2011 were far from straightforward. Lacking a robust LinkedIn, Ashbrook leveraged alumni lists from the five major universities he had worked with. He personally called individuals at nascent companies like Twitter, Palantir, Spotify, and Uber, offering to buy their shares, figuring out the logistics as he went. The secondary market's nascent state meant that companies typically had a right of first refusal on employee share sales, and this practice was far from common. Ashbrook highlights that secondaries were primarily reserved for fund stake purchases and large private equity deals. The growth venture ecosystem had few secondary transactions, partly due to post-financial crisis regulations that deterred traditional managers from engaging in the secondary market, fearing regulatory scrutiny. This created a "broken market" where employees desired liquidity, but companies largely ignored it. Today, the market has matured significantly, and G-squared is now a first mover, often receiving inbound calls rather than having to make all the initial outreach. Ashbrook contrasts his early, less-than-ideal investment methods with G-squared's current sophisticated approach. In the beginning, he relied on "mosaic theory" and lacked comprehensive information or direct engagement with management. Now, G-squared operates like a primary investor, meticulously vetting companies, engaging with management, and demanding full data. Their process has evolved from hiring analysts in India to work overnight to building a substantial, highly skilled team. This evolution has led to unprecedented growth and strong returns for their limited partners (LPs). G-squared thrives at the intersection of exceptional businesses and access, which is the core pursuit for any investment manager. The Spotify investment serves as a pivotal story in G-squared's history. Ashbrook, a music consumer, became aware of Spotify and sought to invest. Initial attempts to contact employees and the company were met with silence. Undeterred, he and a young analyst traveled to Stockholm, persistently seeking a meeting. After days of waiting in the lobby, a junior legal officer eventually granted them an audience. Their persistence led Spotify to begin directing sellers to them. G-squared even placed a sign in the Spotify breakroom offering to buy shares. Spotify, along with other companies, was an early adopter of the strategy of staying private longer, supporting employees by providing liquidity for their stock, which allowed them to retain talent and prevent them from moving to public tech companies. This partnership was mutually beneficial for a long time, though it involved significant stress. G-squared received large blocks of stock they couldn't immediately acquire, necessitating global fundraising efforts. The Spotify IPO was a monumental celebration, marking a significant turning point for G-squared. Regarding G-squared's investment strategy, they focus on a "cash in, cash out" model, returning capital to LPs post-IPO. While they may strategically divest over time, their core objective is to realize liquidity. The Spotify investment, despite its inherent stress, established G-squared's foundational approach. A particularly large transaction for Spotify, which G-squared lacked immediate capital for, led Ashbrook to personally borrow funds without collateral, a testament to his conviction and risk tolerance. This high-stakes decision ultimately yielded substantial rewards. Ashbrook attributes his strong conviction in companies to accessing information akin to a primary investor, enabling him to leverage the secondary market for arbitrage. During the period of noise surrounding streaming services and artists leaving Spotify, G-squared had access to data and updates. Crucially, they observed that record labels, also shareholders, were actively buying more Spotify stock, a significant indicator of their support. This "aha moment," coupled with the understanding that record labels were invested in Spotify's success, allowed G-squared to capitalize on market turbulence and acquire substantial stock at favorable prices, ultimately becoming a top-10 shareholder. The record labels' significant stock purchases were driven by a hidden option to own a certain percentage of the company, a detail not widely known. When dilution occurred due to this option, and simultaneously hundreds of millions of dollars flowed in from the labels, Ashbrook realized their commitment. He understood that the labels, having learned from the Napster era, recognized the shift in business models and were actively supporting Spotify. This insight allowed G-squared to strategically acquire more shares. The Spotify stock was acquired from other funds looking for liquidity. In the 2012-2014 period, many investors, perhaps spooked by market dynamics, sought to exit. G-squared secured a $150 million block from a well-known Nordic venture firm. Due to Spotify's structure as a Luxembourg company, a 60-day settlement period was required. During this time, G-squared raised $141 million, with Ashbrook personally covering the remaining $9 million shortfall through a loan. This investment proved to be a life-changing success. Ashbrook acknowledges the personal risk but emphasizes that his background, having "come from nothing," made him unafraid of such situations. This experience was foundational for G-squared, shaping their future business strategy and enabling them to help companies stay private longer while rewarding employees. G-squared's fund structure evolved from small initial pools of capital with significant LP co-investment to larger, committed capital funds of $1 billion to $1.5 billion. LPs continue to participate in a robust co-investment business. Ashbrook stresses the importance of managing co-investment carefully, as it can pose risks if mishandled. He cites an early Uber investment, where despite the company's success, G-squared lost money due to a lack of public market receptiveness at the time of exit, even though the thesis was correct. G-squared is not a public market investor; their value lies in helping companies stay private, consolidating cap tables, and facilitating tender offers. They require detailed data and management connectivity. Their ultimate goal is a Distribution to Paid-In Capital (DPI) of 2.5x to 3x within five to seven years, aiming for realized Internal Rates of Return (IRRs) of 30% or more annually. This differs from firms chasing higher multiples over longer periods. They cater to LPs seeking this specific return profile and companies that value their support in cap table consolidation. While G-squared has celebrated successes like Spotify, Coursera, Toast, Wiz, Anthropic, and OpenAI, they have also experienced significant losses with companies like Gorillaz, Getir, Pagaya, and 23andMe. Ashbrook emphasizes that raising capital as a General Partner (GP) is challenging, regardless of returns. Investing is easy; selling is hard, and opportunities to sell often coincide with peak market interest, making it difficult to avoid herd mentality. G-squared's Midwestern roots, particularly their Chicago headquarters, foster a risk tolerance focused on generating real alpha rather than simply riding market beta. True success is measured by exit value, not just paper gains. Ashbrook views his role as performing the "hard things" and embraces the "grind." Losses haunt him, and he meticulously analyzes failures, especially those stemming from poor process. In G-squared's secondary-focused strategy (70% of their funds), they underwrite like primary investors, eliminating the excuse of insufficient information. A notable failure was in the quick commerce sector. After significant success with companies like Instacart and Postmates, they deployed substantial capital into quick commerce over 18 months, only to experience a market downturn that impacted their investments. They acknowledge missed opportunities to exit positions in that space and have implemented guardrails to prevent recurrence. Regarding valuation of high-growth companies like Anthropic, OpenAI, and SpaceX, Ashbrook acknowledges the difficulty. For AI-native businesses, the TAM is vast, and investors are essentially paying for future growth. G-squared uses public comparables but acknowledges that for companies like SpaceX, with no direct public comps, a basket of comparables and historical investment analysis is necessary. The key is to find a margin of safety at the entry price. He notes that while they might miss out on "shiny logos" due to valuation concerns, they prioritize underwriting discipline. Ashbrook advises aspiring entrepreneurs to prioritize hiring "grinders"—individuals with a strong work ethic, resilience, and a chip on their shoulder. He cites Turo as an example of a company with a less polished pitch deck but driven founders who ultimately succeeded, while another well-funded competitor with a superior presentation failed. From a GP perspective, he reiterates the mantra: "investing is easy and selling is hard." He advises against chasing multiples or paper gains and following the herd, emphasizing that a sustainable business requires selling winners. G-squared's IR team manages their LinkedIn page and website, as Ashbrook himself is relatively off the grid.