Hedge fund traders return to fray with $1 billion launches
The earlier the investment, the riskier the bet. But the more jawdropping the returns if the company hits it big. Miss one of them, and it haunts you for years.
Snag it, and you can brag for even longer. This simple reality is precisely what makes the venture business hard, and the justification for why partners make such huge fees. Earlier this year, we wrote a lot about the shift in power at the early stages with the rise of super angels, but you could argue there are far greater ripple effects to this new late stage frenzy.
And you could argue, those ripple effects are less well-understood. Super angels move small chunks of money, hedged across thousands of startups. Worst case, they all go belly up.
More likely, the bulk of them barely return capital and a few do really well. Either way, plenty of angels will make bad bets and stop being angels, but the financial damage is otherwise pretty limited. There are plenty of jobs hedge fund traders return to fray with $1 billion launches even the most outrageously failed entrepreneurs.
But the billions of dollars in late stage deals being invested by the top firms in Silicon Valley are another matter.
Each deal represents dozens or even hundreds of people cashing out, while others take on a greater risk.
And each deal represents another delay in companies like Facebook or Zynga going public. Some of it is pure player-hating, and some of it raises good points. Some allege they are even abusing their positions as the current darlings of the venture world to make huge trades in well-baked companies without any board obligations, but still get paid like VCs with huge management fees on these mega funds. Within the elite Sand Hill Road club, VCs snipe about who is still adding value and draw distinctions between a negotiated late-stage deal and a pure secondary stock purchase.
And then there are early stage companies hoping to disrupt giants like Zynga and Groupon and wonder if they should take money from a firm who is placing a much bigger bet on the well-funded giant.
You could argue a firm staying out of the hedge fund traders return to fray with $1 billion launches fray entirely may have a marketing advantage with them. New York investment banks are furious that these deals allow anticipated IPOs in companies like Facebook to be put off as long as the company wants— robbing them of those lucrative banking fees. It seems the only ones who unabashedly love the trend are the handful of companies who now have free money whenever they want it at seemingly any price, without any of the downsides of going public.
First, we wanted to pierce the marketing spin and shine a light on who has done what— and when they did it. Only a small portion of firms can raise this kind of money and have the right connections to get into the best deals.
Likewise as the Valley has become more polarized between huge winners— who raise hundreds of millions of dollars and employ thousands of people— and the small lean startups— who are built to flip— there are only so many deals that can justify these sums of cash and these valuations. The several-billion-dollar-question worrying many limited partners is how speculative hedge fund traders return to fray with $1 billion launches trend will get.
Current company valuations are based on negotiated deals with accredited investors or potential acquisitors, not secondary market speculation. Most of the numbers were from published reports or inside sources. While most of these deals and prices had been reported before, a few things jumped out at me once I collected the data in one place.
When DST pioneered this category, the firm was adroitly responding to a gaping market need. These companies needed huge amounts of cash to scale to the unprecedented 1 billion person online market potential, but the IPO market was closed. Please, dear God, call me! Today, the best companies of the last ten years have all raised late stage money, and the prices are no longer a bargain. History has never shown that strategy to produce venture-style returns, said several top limited partners on the condition of anonymity.
Behind these red and green boxes lurks the same kind entrepreneurial drama that usually goes on in the companies VCs back. While dozens of venture firms are quietly going out of business for the first time in more than a decade, this chart represents the haves. This chart shows dramatic comebacks. In the wake of the dot com crash, limited partners privately told me that Accel Partners was one of two major firms that would never raise a fund again. But he almost single handedly pulled the firm back from the brink.
Accel missed Twitter and Zynga and others, but who cares? The price the firm payed for Groupon is the icing hedge fund traders return to fray with $1 billion launches a massive Web 2. Similarly, Greylock had virtually no presence on the West Coast and no brand in consumer Internet. An early investment in LinkedIn and comparatively early investment in Facebook catapulted the firm into hedge fund traders return to fray with $1 billion launches one of the top names.
On the other side of the chart— literally and figuratively— are Kleiner Perkins and Andreessen Horowitz, the two most aggressive at the late stage game, but utterly different stories are behind the common strategy. Andreessen Horowitz was formed after most of these companies, so getting in early stage rounds was impossible.
The firm was founded explicitly to invest in the best companies whenever the partners could get in. A beyond-late-stage investment in the already-acquired Skype. Kleiner Perkins has been a different story.
This is a firm that hedge fund traders return to fray with $1 billion launches missed the early days of the Web 2. The centerpiece of the strategy was a relatively early investment in Zynga. The success Kleiner has had reclaiming Web relevancy has been a testament to the lasting power of brand in the startup world. Few firms could have pulled it off. Give them credit for getting shares in these scorchingly hot companies even at these prices, but its important for entrepreneurs and the press to realize when they invested.
That leads us to Sequoia and Benchmark— the two firms that are the most absent when it comes to these companies. Indeed, while Benchmark has resisted buying Facebook shares, Cohler has funded some of the most exciting companies to spin out hedge fund traders return to fray with $1 billion launches the Facebook mafia including Asana and Quora.
The real surprise is Sequoia — a firm that was known in the s for flawlessly picking nearly every consumer Web giant. I wanted to keep this graphic focused on the top traditional Valley firms, but there are two obvious omissions. One is DST, which started this trend with its aggressive investments in Facebook that now seem boringly reasonable by comparison to recent deals.
No easy feat in a Valley awash in too much cash to begin with. The other omission is a Valley outsider too: Union Square Ventures, the earliest investor in Zynga and Twitter. In terms of returns, we hear that Union Square has sold enough of its Zynga and Twitter stakes to repay both funds and still leave it with plenty of upside. In terms of bragging rights, Union Square has bested these Valley insiders at the early stage game with at least two of our billion-dollar winners.