While reducing their investments in the startups that have traditionally been their focus, venture capital firms are increasingly active in the stock market, snapping up shares in publicly traded technology businesses that have been battered by the market.
This year, leading VCs like Accel and Lightspeed Venture Partners have been buying back more shares in the public companies they sponsored as startups.
Moreover, some companies, such as Sequoia Capital and Andreessen Horowitz, two of Silicon Valley’s most prominent investors, are purchasing stock in publicly traded technology companies that they did not initially back as startups.
According to VCs, a recent stock selloff has made it possible to acquire shares in well-known technology companies at attractive prices for the first time in years. However, they complain that it is difficult to identify profitable investments in the current startup market, where fresh financings are still costly and the pace of funding rounds has slowed down despite the availability of record amounts of capital.
Several Silicon Valley VCs have reorganized in recent years to increase their investment pool. In the past three years, both Sequoia and Andreessen have become registered as financial advisers, expanding their eligibility to hold assets like cryptocurrency and public equities. In other respects, their actions are similar to those of hedge funds, which increased their investment mandate and poured unprecedented sums of money into companies during the previous tech bull market.
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Byron Dailey, a partner at the law firm Fenwick & West LLP, which assists venture firms in securing funding, has observed that “the lines are blurring” between private and public investing. Many businesses are curious about expanding their role beyond that of a “conventional venture capitalist.”
According to public records, Sequoia’s U.S. startup funds bought nearly 2.5 million new shares in data analytics company Amplitude Inc. and 573,500 new shares in food delivery service DoorDash Inc. in the first quarter. When Sequoia made the purchase, the stock prices of both companies had fallen by more than 60% from their yearly highs.
According to a source familiar with the situation, Sequoia’s startup funds made their first purchases of public stocks of firms it had not previously funded in the third quarter of 2018. There has been no public announcement of these acquisitions by Sequoia.
When the market started to drop around the end of last year, Sequoia partner Pat Grady said the firm started compiling lists of public firms to invest in. After the market meltdown in 2008, Sequoia went through a similar process and identified 20 publicly traded companies. It ultimately invested in two software companies by purchasing shares of Autodesk Inc. and Cadence Design Systems Inc. Mr. Grady stated that the company ultimately wished it had placed more bets on the public market after the financial crisis.
According to Mr. Grady, the firm’s growth investors spend about 25% of their time on the hunt for public investments, as they are the ones who are most concerned with funding firms that are near to going public.
Historically, venture funds like Sequoia’s were constrained by the need to deliver shares back to investors after seven to ten years, prompting the fund to sell off its oldest holdings shortly after their companies went public. Sequoia can keep them forever since they became an investment adviser last year.
Venture capital firms that invest in the public stock market are vulnerable to the huge price swings that are uncommon in the private market, where values tend to fluctuate slowly. It is not always easy to time the sale of public equities, but venture capital firms are almost always certain to make a profit because of the low price at which they obtained their shares.
Some public shares purchased by venture capital companies earlier this year have already plummeted. Even though DoorDash’s second-quarter sales growth exceeded analyst projections, Sequoia’s stake in the food-delivery business has lost nearly 40% of its value since March.
As a result of this uncertainty, there are still some potential fund backers who are hesitant to invest. Pension and endowment funds are among the investors who back venture capital firms because they seek access to the shares of promising but illiquid entrepreneurs.
According to David York, managing director at Top Tier Capital Partners, which finances venture capital funds, “most private market investors are not delighted when their private market enterprises buy public market stocks.” It is against our investment guidelines and our compensation to the investors.
Historically, venture capitalists set themselves apart by betting that they would be the first to recognize the next Uber Technologies Inc. or Facebook, risking billions of dollars in lost revenues if they underestimated a business or lost a competitive contract. As a result, several VC firms are investing in publicly traded companies that they had originally planned to back privately.
According to the document, Andreessen also used the same fund to buy more than 1.4 million shares in DoorDash. Since the company’s investment in DoorDash was very minor when it went public in December 2020, it did not benefit from the massive returns that the company’s wealthiest shareholders saw as a result of the IPO.
Even while the private market has slowed, the investments may help venture capitalists find places to put the record amount of money they’ve raised this year for startup investments. PitchBook Data Inc. announced on Thursday that U.S. venture capital companies raised a record-breaking $151 billion in new funds in 2022.
This may not only be a fad for finding deals. According to those in the know, Andreessen Horowitz has recently discussed establishing a separate fund for public investments and has conducted interviews with applicants for the fund’s management team.
Mr. Grady indicated that Sequoia has not yet hired public-investment professionals, but that it is open to doing so in the future.
New York-based venture capital firm Thrive Capital partner Vince Hankes remarked that the firm had always respected Carvana Co. despite not having invested in the company before its 2017 IPO. The company saw the precipitous fall in Carvana’s stock price last autumn.
Public documents show that Thrive acquired 812,713 shares of Carvana during the first quarter, then roughly doubled its holding in the company during the following months. Thrive’s goal is to retain its public stocks for years, so the business’s strategy is “quite similar to how we make a private company investment,” as Mr. Hankes put it.
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