Venture Capital Goes Public
Private Investors Start Blurring Lines
As close observers of the financial markets, we spend a fair amount of time reading and processing information on subjects ranging from early stage funding rounds to IPO announcements and rumored acquisition deals. In this business, information is currency. That said, the sheer volume of information that comes across our desk tends to make it difficult for any one article to stand out. Which is why, when this headline appeared in Slack, it was noticeably eye-catching.
The headline stood out for a few reasons:
- As a growth equity fund with a clear crossover investment thesis, this behavior from some of the largest US venture firms is intriguing
- The past few years has seen a sharp increase in crossover investing, however from the opposite direction (hedge funds investing into private tech companies)
- Some of you may know that we’ve been conducting some quantitative research on the subject of crossover investing (more to come soon!) so it’s near impossible not to dig into this piece from the Wall Street Journal
The Tides Have Turned
Most of our readers should be familiar with the terminology here. Crossover investing occurs when an asset manager allocates capital to both public and private markets. Historically, these two segments of the market were walled off from one another. Furthermore, the inflection point representing the transition from one to the other (IPO) has tended to be “gate-kept” by an entire industry of investment bankers, lawyers, exchanges and institutional anchors such that the divide has felt evermore distinct. Our philosophy at Revaia has always been that late stage private companies and freshly minted public ones have more in common than not, which is why we we built crossover expertise, allocating a small portion of our first fund to public tech equities. Our knowledge of the listed world has improved via this approach, lending us expertise in helping our portfolio companies through their growth rounds en route to IPO. This strategy, although not uncommon, has had significantly less press in comparison to the converse approach.
A combination of cheap capital, a desire for maximal returns and soaring private tech company valuations led several hedge funds to implement a new strategy. Since 2021, we’ve seen a marked increase of hedge fund participation in private market tech rounds both in deal volume and share of capital. According to our most recent data set, of all the venture capital raised in 2021, roughly ⅓ of it came from hedge funds! This trend was particularly true in the US but has gradually migrated across the Atlantic to become standard practice in Europe. Recent economic conditions, however, have brought about adverse effects, notably among those with bolder approaches (perhaps, riskier is a better term here — see: Softbank).
As market dynamics shift, it appears the tide is moving in the opposite direction.
“Venture capitalists say they are benefiting from a stock sale that has allowed them to buy shares in high-profile tech companies at a good price for the first time in years. At the same time, they say they have struggled to find quality investments in the startup market, where prices for new funding have remained prohibitive and startup rounds have slowed despite record capital.”
– Berber Jin, WSJ
Swimming Upstream
If you’re active on Twitter or attended a tech conference in the past few months, you’ll know it’s hard to escape the aura of the doom & gloom forecasted by analysts and amplified by the media. Layoffs at major tech companies (even wildly profitable organizations like Meta i.e. Facebook), hiring freezes, a reduction in the perks that have become standard at modern tech giants — all in service of extending runway or appeasing public shareholders during the economic downturn. These general concerns and cutbacks have spooked venture investors too. Despite record fundraising ($151B in new money this year according to PitchBook), startup founders are having trouble accessing the capital. Perhaps, as private markets thaw, an alternative strategy is the best way to deploy some stagnant dry powder. In this case, the “alternative” is actually quite traditional: public tech stocks!
Notable venture capital firms are doing exactly that, to varying degrees. Accel and Lightspeed are re-investing in now public companies that they supported during their private fundraising rounds. Same for Sequoia, who is buying the dip of former portfolio companies DoorDash, a food delivery marketplace, and Amplitude, a product analytics tool. Allegedly, this is not the first time these funds have taken these measures. In fact, it appears to mimic behavior taken following the 2008 market crash. Taking it one step further, Andreessen Horowitz is reported to be considering launching a fund dedicated to public investments.
“There is a blurring of the lines between private and public investment. There is a lot of interest in where companies can move beyond being traditional venture capitalists.”
– Byron Dailey, partner at law firm Fenwick & West LLP
Exploring the Paths Forward
As we alluded to earlier in the article, this is a subject we think about a lot. Recent conditions have changed the dynamic; nevertheless, complex times call for bold and unique strategies. Our mindset has remained long-term and value driven, which has served as a north star through unique economic challenges. We’ll be diving into some of the strategies around crossover investing and the path to IPO with founders, executives, investors and bankers in some upcoming publications. Stay tuned!
