Investments from Hedge and Mutual Funds Have Mushroomed This Year and So Have Deal Valuations
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30 | VCJ | May 2014 www.vcjnews.com HEDGE FUNDS STORM INTO VENTURE Investments from hedge and mutual funds have mushroomed this year and so have deal valuations. Will it last? www.vcjnews.com May 2014 | VCJ | 31 Mark Boslet Institutional Venture Partners. “That works money in, meaning they had a major role Senior Editor as long as the market continues. As soon setting price and valuation, according to as the market changes, we often see these company press releases and news reports. You may disagree on whether Dropbox is funds pull back.” “You are seeing some willingness to worth an estimated $9.6 billion, Pinterest, Whether these funds will retreat is hard write large checks for select companies $3.8 billion, or Uber, $3.5 billion. to gauge. So far, there are mixed signals. with a winner take all paradigm,” said But you will agree on this: All are rich Tiger’s ability to close on a new $1.5 billion Timothy Keating, CEO of Keating Capital. valuations and a surge of pre-IPO money venture fund in April suggests access to “I do believe you are seeing some inflation is fueling them to extraordinary heights. capital is not likely a restraint. However, in those highly publicized companies.” One source of that money is hedge and Coatue in March said it planned to return Obviously, big valuations are not con- mutual funds, where deal activity has $2 billion to investors, suggesting second fined to hedge and mutual funds. Other soared this year. thoughts are creeping in. growth and late-stage investors have been What these non-traditional investors Up to now, it is hard to miss the height- active in these deals as well, including – Tiger Global Management, Coatue Man- ened role hedge and mutual funds have such firms as Kleiner Perkins Caufield & agement, TPG Capital, Fidelity Investments played this year. Through mid-April, they Byers and Andreessen Horowitz. and T. Rowe Price – want is an inside track have participated in 23 deals this year But hedge and mutual funds have a dif- to IPOs and access to growth companies with U.S.-based startups, including large ferent way of looking at returns and can they can’t find in the public markets. rounds for Dropbox, Cloudera, Lyft and likely absorb higher mark ups easier than What they have helped create is a spike in mega rounds and valuations, trends with potentially threatening consequences. “There is a risk that “This is momentum investing,” said Tim companies could over fund in Guleri, managing director at Sierra Ven- tures. “Overall, too much of this is a dan- this market environment.” gerous trend.” The danger will mount with any change Jules Maltz in the IPO window, or if public valuations General Partner fail to recover from their March selloff. Institutional Venture Partners Either could place private company valua- tions under pressure and chip away at the market value of portfolios priced off them. It will be an issue of special importance to VCs over the coming months. After years of being the forgotten asset class, Intarcia Therapeutics, according to data VCs. A 1.5x return over 18 months might venture has come bounding back with from Thomson Reuters (publisher of VCJ) satisfy a hedge or mutual fund while it rising returns, improved fundraising and and other industry sources. probably wouldn’t a VC. promising portfolio exits. Overfunding a If this pace continues, the year could Whether all this will end badly is any- generation of portfolio companies could end with 75 to 80 deals involving a hedge one’s guess. undermine some of these gains just as the or mutual, a substantial increase from last Some investors may make a killing. Oth- limited partner perception of the industry year’s 41. ers will lose out. It will depend on the con- is beginning to change. Equally significant is the massive size of tinued health of the public markets. Already some venture investors have the transactions. Hedge and mutual funds As of the writing of this story in mid- begun to show caution and back away have participated in 14, or 60 percent, of April, it was unclear whether the markets from late-stage financings because of the this year’s largest two-dozen U.S.-based would bounce back from their recent sell- high level of competition. deals with disclosed investors, compared off, when the stocks of high-flying ven- Anytime there is a bull market, outside to about 38 percent last year. ture-funded IPOs, such as Workday, Splunk money wants to get into late stage financ- What’s more, in 13 of these deals they and Yelp, lost about a third of their value ings, said Jules Maltz, general partner at were a lead investor or represented new and others, FireEye for instance, saw big - VC deals with hedge and mutual fund investors Expansion and late-stage venture investments 100 8 79 $6.46 80 6 $4.89 $5.13 60 $4.25 $4.36 s 42 41 4 40 30 21 22 In million 2 20 0 0 2009 2010 2011 2012 2013 2014* Q1 ‘13 Q2 ‘13 Q3 ‘13 Q4 ‘13 Q1 ‘14 Sources: Thomson Reuters, MoneyTree Report data on U.S.-based companies; and news reports. Sources: Thomson Reuters, MoneyTree Report data on U.S.-based companies. Note: For 2014, the projected total for the year if the pace continues is 79. The actual number of 2014 deals year-to-date through April 15 is 23. 32 | VCJ | May 2014 www.vcjnews.com COVER STORY Valuation discipline remains, mutual fund investors say The goal is to invest in Valuations are specific to each com- has participated in deals with Cloudera, the cream of the crop pany. Fidelity relies not just on public Wayfair and Eventbrite this year. and to develop a long- market comps, but its knowledge of “When we make these investments, particular market segments and a com- we are looking for companies that we term relationship with a pany’s historical financials and projec- believe have the potential for major suc- company in advance of tions to arrive at a valuation, he said. cess over the long term,” the firm said. its IPO One benefit of doing a transaction is Venture capitalists and entrepreneurs that it can help Fidelity develop a long- describe mutual and hedge fund inves- Amid this year’s explosion of pre-IPO term relationship with a company and tors as sophisticated, easy to work with financings, mutual fund investors insist side step the pre-IPO “speed dating” that and knowledgeable. Often investments they have been selective dealmakers and takes place between companies and pro- are research driven and focused on par - disciplined on valuations. The cream of spective public market investors prior ticular market segments where a firm the crop, they say, is their goal. to an offering, he added. When the IPO has a special expertise, they said. “We meet with a lot of private com- comes around, Fidelity will be better One benefit of doing a deal is its abil- panies,” said Andrew Boyd, head of able to make an investment decision. ity to help position a young company for global equity capital markets at Fidelity Whether it actually helps Fidelity an IPO. Investments. “It’s a very small number secure a bigger chunk of an IPO is a mat - “To get a Fidelity or T. Rowe Price in of those that we make investments in.” ter of debate, Boyd added. Allocations your cap table signals that the company This year’s feeding frenzy has helped are in the hands of the underwriters. is a good prospect for an IPO and may Boyd and other mutual fund investors T. Rowe Price also describes itself as a be well received by the public investor,” gain access to growth companies with selective investor. said Timothy Keating, CEO of Keating the potential for public offerings. It “We don’t invest in every private Capital. “It is a very positive trend.” also offers insight into the technologies company that comes to us,” it said in Entrepreneurs also remain open-mind- transforming major markets. its statement. “We only choose the deals ed. Asaf Cidon, co-founder of Sookasa, To mine this wealth of knowledge, that we believe make sense.” said hedge fund investors approached T. Rowe Price, for instance, assigns a To arrive at a valuation, the firm looks him recently. The company, which research analyst to each investment. not just at public market comps, but at adds encryption to cloud based storage, This way, deals offer not just returns to a company’s financial results, business announced a $5 million Series A round clients but insights into possible busi- model, potential for revenue, profitabil- in April with the support of Accel Part- ness threats to existing holdings, the ity, market share, durability, prospects, ners, First Round Capital, Andreessen firm said in a statement to VCJ. past performance and management Horowitz and SV Angel, but without a “You can’t ignore the private compa- team. hedge fund backer. nies,” added Boyd. There is a lot of dis- “There is significant liquidity risk Cidon said he would consider tak - ruption taking place. and sometimes the companies can run ing money from hedge funds in future At Fidelity Investments, private com- into unforeseen roadblocks that effect rounds. pany investing is both opportunistic and their ability to compete,” T. Rowe Price Hedge and mutual fund money helps thesis driven, he said. The firm looks to said. “Not all of these companies fulfill entrepreneurs, he said. It can provide participate in the final round of private their promise.” liquidity for founders and early employ- financing for companies that appear able As a result, often less than 1 percent ees, and give companies the chance to to make the leap to the public markets.