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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