Although banking failures and a weak IPO market have meant trouble for many startup companies, the headwinds have managed to clear a path for the launch of startup-focused lending platform Prism.
The Hollywood-based company allows employees of pre-IPO tech companies with valuations of $1 billion or higher to borrow against their company equity for personal use without having to wait years for the company to go public.
Ari Stiegler, Prism’s chief executive, who has been in the technology sector for about a decade, said he found it surprising that there had been little to no liquidity for shareholders to access until private tech companies exit via IPO.
“We thought, if you can take out a loan against a piece of real estate or against publicly traded stock, why can’t you take out a 20% loan against a private tech company valued in the billions with $50 to $100 million traded every month in the secondary markets?” Stiegler said.
Personal experience
The pain point of scarce liquidity is one Stiegler is familiar with, having been involved in the creation of startups such as TutorMe, a live online education platform acquired by publicly traded education technology company Zovio in 2019. He is also the managing partner at Larchmont-based VC company Flux Capital.
Stiegler recalled trying to borrow liquidity through various financial positions in the late-stage tech market and being met with high APRs and expensive quotes.
“That’s not how it should be structured. It should be structured as a straight loan. (The borrower) pays their monthly interest and they get to keep all the upside.”
The interest rates and fees on Prism’s loans, according to Stiegler, are mainly based on company financials and on a secured overnight financing rate, a borrowing rate that clocked in at 4.8% as of April 18.
Prism was established last year, but it wasn’t until recently that it received its series A funds in the form of a $26 million round led by Menlo Park-based Pantera Capital and Bay Area-based Human Capital. According to the fundraise announcement, the firm has signed multiple agreements to begin originating loans in the coming months and has a pipeline of more than $100 million in loan volume.
Big opportunities
As it gears up for growth, Stiegler sees an opportunity for Prism within the chaos of recent bank failures and a struggling IPO market.
Stiegler said that banks such as Silicon Valley Bank, First Republic Bank, Credit Suisse and UBS used to provide lending services similar to Prism’s on a case-by-case basis for valuable clients.
“What’s basically happened in the last couple months with the whole banking crisis is that previously, they were kind of indirect competitors,” Stiegler said. “But now these banks aren’t doing that type of business, or these banks don’t even exist anymore, so competition from that front has significantly decreased, if not been completely eliminated.”
Stiegler noted the difference between Prism and standard bank lending for individual clients comes down to bank-favored recourse loans, which allow lenders to go after assets if money is not recouped, and the non-recourse loans adopted by Prism, which can only go after the collateral offered for the loan.
“Folks are also now, as a result (of the bank failures), more concerned than ever with their own personal security, financial security and liquidity,” Prism Co-Founder and Chief Operating Officer Noah Friedman said. “There’s a lot more people who are looking to actually tap into their previously illiquid holdings so that they can have as much cash on hand to be prepared for whatever comes.”
The state of the IPO market has also set the stage for Prism’s growth. Last year, according to data from Ernst & Young, global IPO volumes fell by 44% from January to September compared to a year earlier. The professional services company also found that the Global IPO market continued to struggle in the first quarter of this year, experiencing an 8% decrease in IPO volumes.
Friedman added that the employees or executives of companies with plans to IPO have likely had to modify personal finance planning that once revolved around securing liquidity.
“Companies that were expecting an exit within let’s say, 12 months … that 12 has now been replaced with a big question mark,” Friedman said.
Stiegler summed up the banking failures as a factor that has helped Prism gain clients, while the state of the IPO market has helped the firm retain clients.
Davide Accomazzo, a finance instructor at Pepperdine Graziadio Business School, sees Prism’s business model as one that is not unique, but also not widespread among other companies.
He said as large wealth has built up in companies in the last 30 years through restricted stock and options, an avenue for liquidity has become needed.
Eventually, non-traditional lenders filled the space. One issue with this lending model is that private companies nowadays tend to delay going public in order to retain control and avoid increasing compliance issues; this increases the risk of holding pre-IPO stock as collateral,” Accomazzo said.
Prism said in the case of a company going under prior to IPO, there is no danger to individual employees because there is no personal recourse with their loans. The only collateral is a startup’s equity, which would be sold on the secondary market.
“Tech is a very volatile sector, where valuations can change one day to the next, so we need to be quite conservative in underwriting and really dig into the financials,” Stielger said. “Two years ago, with the hype of tech, there were a lot of rounds getting done within a week and not a lot of due diligence. We look at it very differently. At the end of the day, this is like a credit underwriting. So we have to be quite cognizant of that.”
