What happens to Carta now?

Cap table management startup Carta has been dealing with a PR nightmare for the past couple of days. This isn’t Carta’s first public scandal, to be clear, but this new one seemed to cause more of a stir because it directly affected its customers.

So, what happened? The short of it is that one sales employee, according to Carta, used confidential data from one of the company’s customers to craft a sales pitch for a secondary stock sale. The act was an obvious violation of Carta’s ethics and customers’ data privacy. The company initially paused secondary trading, and then last night said it would shut down that business altogether.

The problem, according to Carta, is taken care of. But the company’s clients — investors and startups — may not love that there was a pretty blatant breach of ethics and violation of privacy at a provider that houses some of their most sensitive data.

Before we dive into what this mess might portend for Carta, we need to understand the state of affairs at the company before this came to light. Henry Ward, Carta’s co-founder and CEO, said in a Medium post Monday night that Carta’s annual recurring revenue was $373 million, of which only $3 million was from these secondary sales. The company’s last primary round was raised in 2021 at a $7.4 billion valuation.

While Carta hasn’t raised a round since that 2021-era transaction, per secondary data from platforms like Hiive, Caplight and Notion, its current valuation is estimated to be about half of its last primary round.

Now, that isn’t terrible when you compare that valuation haircut to current valuation trends for late-stage startups. My colleagues Alex Wilhelm and Anna Heim also wrote Tuesday morning that the company’s growth over the last few years has been promising, even without the secondary markets business.

So the company was doing well, by 2023 standards, and seems to have moved quickly to quell damage from the misstep. It’s too early to tell definitively what happens now, but how customers and investors react in the medium term will give us a better idea.

Carta has been able to grow into the company it is now because it has customers on both sides of startup dealmaking. As the company’s revenue breakdown highlights, startups and investors make up 93% of its revenue. For Carta to have any chance of getting back on track, it needs to retain and continue to grow this customer base.

On Monday, Anand Sanwal, co-founder and executive chairman of CB Insights, wrote in his newsletter that he didn’t think the Carta trading incident would cause a large percentage of customers to jump ship. He said CB Insights analysis found that Carta’s customers are pretty happy with the service and, on average, 89.2% of them intend to renew their contracts.

It’s also worth pointing out that while there are competitors like AngelList and Pulley, moving to another platform could prove difficult, especially for late-stage startups, and wouldn’t come without fees. Multiple high-profile Carta customers like Parker Conrad posted on X to say that they are happy with how the company responded and are very happy customers.

If a noticeable chunk of Carta startup and venture customers do leave, it would hurt the company’s otherwise impressive revenue figures, but that seems unlikely to happen.

The other factor at play concerns the company’s own investors. While I would have a hard time wrapping my head around investors precluding future investment in a late-stage startup that actually has a solid business model and real revenue — in this economy — I’ve been surprised before.

Recent secondary data, or the lack thereof, regarding closed deals on Carta’s shares doesn’t imply that investors have a ton of confidence that the startup will grow into its prior valuation. Platforms like Caplight have shown that there are significantly more folks looking to sell their Carta shares as opposed to folks looking to buy them.

Dan Primack at Axios also raised a good point in his newsletter Tuesday: What percentage of Carta investors backed the company because of its aspirations of growing into a secondary sales marketplace? That’s interesting to mull over, especially because Ward pointed out in his post that creating a market for secondary transactions was the actual business the startup got into from the start.

But if investors look at the numbers, this secondary trading business may not be the worst thing to eliminate. Forge Global, a secondary trading platform that went public at a $2 billion valuation after raising more than $350 million in VC, now has a market cap of $457 million. That’s not that far off from Carta’s annual recurring revenue of about $373 million at the moment.

All this drama is reminiscent of some of the early panic around Silicon Valley Bank’s collapse. In both cases, what happened was bad, but it was mitigated rather quickly, and many who initially thought about leaving ended up exactly where they started once they realized how painful it would be to try and take their business elsewhere.

I’m not sure this will end up having a material impact on Carta or how startups and investors interact with it. I’ve been wrong before, but if the scandals from last year and the year prior didn’t move the needle, it’s unlikely this will move it much, either.