Venture capital firms are jumping into the stock market and buying up underperforming publicly traded stocks in tech companies while investing less in the startups that have long been their focus.
Several large venture firms, including Accel and Lightspeed Venture Partners, have bought more shares of companies they first backed as startups this year, defying the industry norm to sell those shares soon after public filings.
Other firms — including Sequoia Capital and Andreessen Horowitz, two of Silicon Valley’s best-known investors — are going further, buying shares in public tech companies they didn’t previously back as startups.
Venture capitalists say they are taking advantage of a selloff that has allowed them to buy shares of high-profile tech companies at bargain prices 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 shrunk despite record capital.
In some cases, Silicon Valley venture firms have restructured to allow for expanded investment horizons. Sequoia and Andreessen have signed up as investment advisers in the past three years, a move that allows them to own more assets such as cryptocurrencies and public stocks. In some ways, their behavior mirrors that of hedge funds, which also broadened their investment mandate during the recent tech bull market when they raised record amounts of money into startups.
“There are blurred lines” between private and public investment, said Byron Dailey, a partner at the law firm Fenwick & West LLP, which helps venture firms raise new capital. “There is a lot of interest in where companies can go beyond being a traditional venture capitalist.
In the first quarter, American startup funds Sequoia bought over 2.5 million new shares in the data analysis company Amplitude Inc.
and 573,500 new items in the DoorDash food delivery service Inc.,
according to public filings, two companies that counted Sequoia as one of their largest shareholders when they went public. At the time Sequoia bought the shares, both companies’ stock prices were down more than 60% from last year’s all-time high.
““There is a lot of interest in where companies can go beyond being a traditional venture capitalist.“
In the third quarter, Sequoia’s startup funds also bought public shares of new companies they had not previously backed, according to a person familiar with the matter, the first time they have done so since 2017. Sequoia has not publicly disclosed the purchases yet. .
Pat Grady, a partner at Sequoia, said the firm began shortlisting public companies to invest in when the market began to decline late last year. Sequoia went through a similar exercise after the 2008 crash, when it came up with a list of 20 public companies. It ended up buying two shares – in software companies Autodesk Inc.
and Cadence Design Systems Inc.
Mr. Grady said the company eventually regretted not making more bets on the public market 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 about 25% of their time seeking public investment.
Historically, venture funds including Sequoia were required to return shares to investors after seven to 10 years, a constraint that often forced them to divest their oldest companies soon after public listings. After signing up as an investment advisor last year, Sequoia can now hold on to them indefinitely.
Investing in the public stock market also leaves venture firms susceptible to wild price swings that are rare in the public market, where valuations can be slow to change. Timing the sale of public shares can be more difficult than simply selling shares after public listings, which usually guarantee venture firms a profit based on how cheaply they acquired the shares in the first place.
Purchases of some public stocks of venture capital firms since earlier this year have already declined, reflecting the risk. Sequoia’s DoorDash investment since March has fallen more than 40% of its value, even as the food company’s second-quarter revenue growth beat analysts’ estimates.
Such fluctuations have caused some fund investors to still question the strategy. Investors, including pension funds and endowments, also support venture funds because they particularly want exposure to hot startups that are hard to get equity in, not public stocks they can buy on their own.
“Most private investors are not excited when private companies buy securities in the public market,” said David York, managing director at Top Tier Capital Partners, which backs venture funds. “That’s not what we’re asking them to do as investors, and that’s not what we’re paying them to do.”
Historically, venture capitalists have distinguished themselves by being the first to identify the next Uber technology Inc.
or Facebook and risk billions of dollars in lost profits if they judge a startup or lose a competitive deal. Some venture firms are buying public shares of companies they may have hoped to support as startups.
In the first quarter, Andreessen Horowitz bought 1 million new shares in the financial services company Block Inc.
from its latest $5 billion growth fund, which was raised with the goal of backing large startups, according to a public filing. Founder Marc Andreessen once said one of his regrets as an investor was not backing Block, formerly known as Square, as a private company. The news site Information previously reported on the company’s purchase of Block shares.
Andreessen also bought over 1.4 million shares of DoorDash from the same fund, the filing said. The company only owned a small stake in DoorDash when it went public in December 2020, missing out on the blockbuster benefits the food company’s largest shareholders received from the IPO.
The investments could also help venture capitalists find opportunities to invest the record amounts of capital they’ve raised this year into startups despite a sluggish private market. U.S. VC 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 move beyond making a bargain. Andreessen Horowitz has recently considered launching a new fund dedicated to public investments and has interviewed potential candidates to help run the fund, people familiar with the move said.
Mr. Grady said Sequoia is open to hiring public investment professionals in the future, although it has no immediate plans to do so.
Vince Hankes, a partner at New York venture capital firm Thrive Capital, said his team had long admired the business behind Carvana. Co.
a used car dealer that Thrive hadn’t supported before it went public in 2017. When Carvana’s stock began cratering last fall, the company took notice.
Thrive ended up buying 812,713 shares of Carvana in the first quarter and nearly doubled its stake in the following months, according to public filings.
“We think of it very similarly to how we invest in private companies,” Hankes said, adding that Thrive’s goal is to keep its public stock for many years.
—Tom McGinty contributed to this article.
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