By Eliot Brown 

Nearly a decade ago, venture-capital firm Sutter Hill Ventures made a small wager on an idea for a cloud computing services company, helping found and fund Snowflake Inc.

The bet paid off: Last month, Sutter Hill distributed a profit of nearly $12 billion on the less than $190 million it ultimately invested, as it transferred its shares in the company to its investors and partners, marking one of the most profitable investments ever in venture capital.

The venture sector has long been defined by big wins on disruptive tech companies, balanced by far more numerous losing bets. But in recent months, an unusually large number of venture investments have logged multibillion-dollar profits, setting many firms up for their greatest returns since the dot-com boom of the late 1990s.

Today, Sequoia Capital, an early backer of giants including Apple Inc. and Alphabet Inc.'s Google, holds more than $14 billion of stock in Airbnb Inc. that it got by investing about $235 million, as well as $8.4 billion in stock in DoorDash Inc. that came from investing more than $240 million, securities filings show.

Accel holds more than $7.5 billion of stock in recently listed software company UiPath Inc., a huge profit on the $172 million it invested. Altos Ventures put nearly $400 million into gaming platform Roblox Corp., according to a person familiar with the matter, for a stake now worth $8.5 billion. Andreessen Horowitz, an early backer of Coinbase Global Inc., holds over $6 billion of stock in the company and recently sold or transferred to its investors another $3.2 billion.

Venture firms generally hold most of their investment in a company until it goes public. Depending on the firm, some sell or transfer shares in a company to the firm's investors once a lockup period expires post-listing -- as Sutter Hill did with Snowflake -- while others hold longer, hoping the stock goes up more.

Aside from Sutter Hill, these funds have yet to sell or transfer most of the stock to their investors. If they did so today, the gains would eclipse several of the best-ever venture investments in U.S. companies in overall dollars, including Accel's more than $5 billion profit on a $15 million early investment in Facebook Inc. and Kleiner Perkins' $7 billion profit on a $3 million investment in Juniper Networks Inc. in the dot-com boom. Both those investments were far more lucrative on a percentage basis than the recent crop of winners.

Interest in stocks of fast-expanding companies, particularly newly listed tech companies, is fueling the burst of big profits now. With low interest rates, a host of stimulus actions by the federal government and a flood of amateur investors getting into stock trading, demand for those shares has surged.

"There's a flight to growth and a flight to innovation," said Julia Feldman, a managing partner at Silicon Valley Bank who oversees the bank's arm that invests in venture-capital funds. Prices have become quite high, she said, and she is "cautious about valuations and what that means for future investments."

Valuations have been rising particularly sharply relative to companies' revenue, a trend that echoes aspects of the dot-com bubble, and are a big factor behind the sudden run of highly valued companies listing on the stock market.

Between 2002 and 2019, the median tech IPO price-to-sales ratio -- a company's total market capitalization divided by the past year's revenue -- never cracked 12 for each calendar year, according to Jay Ritter, a professor at the University of Florida's business school who tracks IPOs. In 2020 the ratio was 23, by far the highest since the dot-com bubble popped. Thus far in 2021, it is 20.

Similarly, 2021 is on pace to have a record number of IPOs of companies valued above $5 billion after the first day of trading. There have been 21 this year so far, well above the pace of the 42 such IPOs in all of 2000, according to Mr. Ritter.

The venture-capital sector is a clubby -- and relatively small -- corner of the private-investment sector that typically raises $30 billion to $40 billion a year from college endowments, foundations and wealthy investors. Venture funds then spread their bets across numerous companies, and while most perform poorly, an investment in a single big winner can easily eclipse losses.

Often the venture sector as a whole performs similar to or worse than a broader stock index like the Nasdaq Composite, though the best funds tend to do far better.

For instance, for venture funds that were raised between 2010 and 2015, the median fund tracked by private investment data company Burgiss Group LLC has had an average annual return of nearly 16%. By contrast, the top 5% of funds have posted annual returns of over 42%, according to Burgiss.

The biggest winners can lead to profits that far exceed the size of a fund. Sequoia used a fund that raised around $420 million from investors for its initial investment in Airbnb, later supplementing it with money from other Sequoia-run funds. Today the Airbnb stock held by that initial fund alone is worth more than $10.8 billion, or more than 25 times the amount raised for the fund. That fund also saw big gains on early investments in Dropbox Inc. and Unity Software Inc.

The recent spate of megahits in the U.S. still lags behind foreign standouts. SoftBank Group Corp. put over $200 million into Chinese e-commerce company Alibaba Group Holding Ltd. after first investing in 2000, a stake today worth more than $150 billion, even after SoftBank has sold many billions of dollars of Alibaba stock.

SoftBank's Vision Fund is also sitting on over $25 billion in stock of South Korean e-commerce site Coupang Inc., in which it invested less than $3 billion, and over $9 billion of gains on a $680 million investment in DoorDash.

For the U.S. firms, other factors have aided the burst of big profits beyond the market rally. Companies have been staying private for years longer than was customary a decade ago, growing to become large organizations before listing publicly.

In addition, venture-capital firms have been expanding, raising additional funds targeted at older startups. The result is venture firms are putting far more investment into companies, so while the overall returns in terms of billions of dollars are larger, the percent returns tend to be smaller than the best returns of the late 1990s.

Of course, early investments in the biggest companies can still show enormous gains.

Garry Tan, a partner at Initialized Capital, put $1.3 million of his fund's money into Coinbase soon after it was founded in 2012. As of this week, that stake was worth more than $530 million.

"I think we're going to continue to see more unusually highly valued exits," he said.

Rolfe Winkler contributed to this article.

 

(END) Dow Jones Newswires

April 28, 2021 07:37 ET (11:37 GMT)

Copyright (c) 2021 Dow Jones & Company, Inc.
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