Venture capitalists are jumping onto the stock market, buying up battered shares in publicly traded tech companies at a time when they are investing less in the startups that have long been their focus.
Some big venture capital firms, including Accel and Lightspeed Venture Partners, have bought more shares of companies they first backed as startups this year, defying the industry norm of selling those shares shortly after IPOs.
Other companies, including Sequoia Capital and Andreessen Horowitz, two of Silicon Valley’s most prominent investors, are going a step further by buying shares in public tech companies they hadn’t previously backed as startups.
Venture capitalists say they are profiting from a stock sale that has allowed them to buy shares in top tech companies at a good price for the first time in years. At the same time, they say they have struggled to find good investments in the startup market, where prices for new funding have remained expensive and seed rounds have slowed despite record capital.
In some cases, Silicon Valley venture capital firms have restructured to allow for a broader investment scope. Sequoia and Andreessen signed up as investment advisers over the past three years, a move that allows them to hold more assets such as cryptocurrencies and public stocks. Their behavior in some ways mirrors that of hedge funds, which also expanded their investment mandate during the recent tech bull market when they piled record amounts of cash into startups.
“There’s a blurring of lines” between private and public investment, said Byron Dailey, a partner at law firm Fenwick & West LLP, which helps venture capital firms raise new money. “There is a lot of interest in knowing where companies can go beyond traditional venture capital.”
In the first quarter, Sequoia’s U.S. seed money bought more than 2.5 million new shares in data analytics company Amplitude Inc.
and 573,500 new shares in food delivery service DoorDash Inc.,
according to public documents, two companies that counted Sequoia as one of their major shareholders when they went public. At the time Sequoia bought the shares, both companies’ stock prices were down more than 60% from all-time highs of last year.
““There is a lot of interest in knowing where companies can go beyond traditional venture capital.””
In the third quarter, Sequoia’s seed funds also bought public shares of new companies they hadn’t previously backed, according to a person familiar with the matter, the first time since 2017. Sequoia has yet to publicly disclose. these purchases. .
Pat Grady, a partner at Sequoia, said the company began compiling lists of public companies to invest in when the market began to plunge late last year. Sequoia engaged in a similar exercise after the 2008 crash, when it compiled a list of 20 public companies. He ended up buying two stocks – in software companies Autodesk Inc.
and cadence design systems Inc.
Mr Grady said the company ultimately regretted not making more public markets bets in the wake of the financial crisis.
Mr Grady said the firm’s growth investors – those focused on backing startups close to public listings – now spend around 25% of their time seeking public investment.
Historically, venture capital funds, including Sequoia, were required to return shares to investors after seven to 10 years, a constraint that often required them to relinquish shares of their oldest companies shortly after their IPO. After signing up as an investment adviser last year, Sequoia can now hold them indefinitely.
Investing in the public stock market also makes venture capitalists vulnerable to wild price swings that are rare in the private market, where valuations can be slow to change. The timing of the sale of public shares can be more difficult than simply selling shares after public listings, which generally guarantees venture capitalists a profit given the low cost at which they initially acquired the shares.
Purchases of some public stocks by venture capitalists earlier this year have already fallen, illustrating the risks. Sequoia’s DoorDash investment from March lost more than 40% of its value, even as the food delivery business’ second-quarter revenue growth beat analysts’ estimates.
Such volatility has caused some fund investors to remain skeptical of the strategy. Investors, including pension funds and endowments, also back venture capital funds because they specifically want exposure to hot startups with hard-to-find stocks, not public stocks that are hard to come by. ‘they can buy by themselves.
“Most private market investors aren’t thrilled when their private market companies buy public market securities,” said David York, managing director of Top Tier Capital Partners, which backs venture capital funds. “That’s not what we ask them to do as investors, and that’s not what we pay them for.”
Historically, venture capitalists have distinguished themselves by being the first to identify the next Uber Technologies Inc.
or Facebook and risked billions of dollars in lost profits if they misjudged a startup or lost a competitive deal. Some venture capitalists buy the public shares of companies they might have hoped to back as startups.
In the first quarter, Andreessen Horowitz bought 1 million new shares in financial services company Block Inc.
of its latest $5 billion growth fund, which was raised with the goal of backing big startups, according to a public filing. Co-founder Marc Andreessen once said that not backing Block, formerly known as Square, as a private company was one of his regrets as an investor. News site The Information previously announced the company’s purchase of Block stock.
Andreessen also purchased more than 1.4 million shares of DoorDash from the same fund, according to the filing. The company only had a small stake in DoorDash when it went public in December 2020 and missed out on the blockbuster gains the food delivery company’s major shareholders made from the IPO. .
The investments can also help venture capitalists find opportunities to invest the record amount of capital they have raised this year for seed investments despite the slowdown in the private market. U.S.-based venture capital firms raised $151 billion in new funds in 2022, already surpassing last year’s record, according to data released Thursday by PitchBook Data Inc.
The trend could go beyond bargain hunting. Andreessen Horowitz recently considered launching a new fund dedicated to public investments and interviewed potential candidates to help manage the fund, people familiar with the efforts said.
Mr. Grady said Sequoia would be open to hiring public investment professionals in the future, although he has no immediate plans to do so.
Vince Hankes, a partner at New York venture capital firm Thrive Capital, said his team has long admired the company behind Carvana. Co.
a used-car retailer that Thrive hadn’t backed before its 2017 IPO. As Carvana’s stock began to tumble last fall, the company took notice.
Thrive ended up buying 812,713 shares of Carvana in the first quarter and then nearly doubling its stake in the following months, according to public filings.
“We think about it very similarly to how we invest in a private company,” Hankes said, adding that Thrive’s goal is to keep its stock public for years.
—Tom McGinty contributed to this article.
Write to Berber Jin at [email protected]
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