Many public market investors started entering the world of venture capital-backed startups about a decade ago, and the ripple effects are obvious. Think of faster funding rounds in general, higher valuations, and venture capitalists that have raised ever-increasing funds rather than ceding territory to their newer rivals.
Of course, a pullback from this same now massive group of cross-investors could also have dramatic ripple effects. The sudden downturn in markets has already dropped billions of dollars in market value for a variety of publicly traded tech stocks, making richly valued startups a little less attractive now by comparison. A terms sheet offered to a London-based cryptocurrency infrastructure company was taken down last week by one of the most prolific investors in recent years. It certainly won’t be the last terms sheet to be pulled in the absence of another abrupt market turn.
“You can bet your last dollar that every investor in Coatue, Dragoneer, D1 [Capital Partners]Tiger – these crossover funds – are finding more value now in public markets now than in private markets,” says Mitchell Green, founder of his own 12-year crossover company, cutting edge capital. “Their time allocation, I’m sure, also changed accordingly.”
Green’s own team is shifting focus. Lead Edge is primarily a growth equity fund – with $3 billion in assets under management today. It is only allowed to invest up to a quarter of its capital in public stocks, according to its agreement with its investors, and these companies “tend to be companies with a market capitalization below $10 billion,” says Green. (Some of the company’s most prominent portfolio companies include Spotify, Alibaba, Duo Security and Bytedance.)
Normally, this doesn’t seem like a constraint, but right now, the market is “giving us better value values in public markets than in private markets,” he notes, which is prompting Lead Edge to buy shares in public companies. where he already holds positions, as well as starting new positions.
For added firepower, it is also increasingly turning to a public fund it runs on the side and raised last year to give its limited partners — many of them former and current rich operators — more exposure in the public market. That vehicle, which raised about $150 million in capital commitments, says Green, had four positions a month ago; now owns shares in “six or seven companies; We’ve been buying things.”
The big question is how long public market shares are on sale and how long private companies hold their position. While public and private market prices are correlated, it often takes time for the private market to recover. During the last public market crash in March 2020, stock prices rallied so quickly that they had little impact on startup valuations, except for those unlucky enough to try to raise funds in that period.
While major US stock indexes have dropped between 6% and 13% this month, “prices haven’t really gone down yet,” says Green.
Well, they didn’t, apparently. Green adds that he is aware of “negotiations” starting to take place between investors and growth-stage companies in some cases. “I’ve heard rumors,” he says. Meanwhile, according to The Information, Tiger Global is already actively managing downward expectations. The channel reports, for example, that before recently transferring money to Blockdaemon, a New York-based blockchain infrastructure company for node management and staking, Blockdaemon was requested and granted to a 20% drop in rating. (Blockdaemon denies that the deal has been reevaluated.)
The agency says that late last year, Tiger also asked to reduce the price of a Series C deal for Estonia-based identity verification startup Veriff, after noting the sale of tech public shares.
If public prices continue to fall, more growth-stage companies appear to be squeezed.
“I think a lot of growth stock funds probably can’t do much more in public. [investing], but I wish they could,” says Green. “I think those who can do more” – and this is now a Many of companies, between hedge funds, mutual funds, family offices and venture capital firms like Andreessen Horowitz — “are looking at a lot of things right now.”