The trend of public market investors increasingly backing startups has been going on for a few years now. Entities such as Tiger Global Management and Insight Partners–not traditional venture capitalists–have invested in some of the most high-profile startups in the world. Tiger, for example, is the most prolific investor in unicorn companies, according to Crunchbase data.
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But with inflation worries and geopolitical issues rocking the public markets, at least some of these “crossover investors” have pulled back on investing in startups during the first quarter of 2022, while others have ramped up their pace, according to Crunchbase data.
For the purposes of this article, we looked at some of the most deep-pocketed crossover investors–or the private equity/growth investors that led or co-led funding rounds by the highest total amounts last year. We compared the number of deals they participated in during the first quarter of 2022, through March 25, to the same period last year.
According to Crunchbase data, Tiger and the SoftBank Vision Fund have more than doubled their deal count from the first quarter of 2021 to the same period this year, while others such as T. Rowe Price have appeared to slow down their pace, at least in the first quarter.
Why fewer deals?
There may be a few reasons why some firms have done fewer deals in VC-backed companies this year compared to Q1 last year. The biggest possible reason is that stocks are essentially “on sale” with lower valuations, while that valuation adjustment may not have trickled down to the private market yet.
We’ve reached out to firms who appear to have done fewer deals for comment and will update if we hear back.
“It stands to reason that if they have a broad mandate as a fund strategy, they may see better deals on the public market front,” said Patrick Healey, president of Caliber Financial Partners, and a financial adviser and wealth manager.
The private markets tend to lag behind the public markets, so many private companies likely still have relatively high valuations, according to Josef Schuster, founder of IPOX Schuster LLC, a firm that offers financial services related to new listings.
“The fact that the Nasdaq has been in a bear market for at least a few weeks here, there have been a lot of valuation adjustments going on in the public markets but the private markets I don’t think have caught up to it fully,” Schuster said.
In other words, why invest in private companies that still have high valuations, when you can invest in public companies that have seen their valuations come down?
Kin Insurance CEO Sean Harper pointed to this during a recent conversation about the current fundraising environment. He noted that the company’s 2021 Series C, which totaled nearly $64 million, was led by a crossover investor, hedge fund Senator Investment Group. With its Series D this year, there wasn’t any meaningful participation from a crossover investor.
Some crossover investors could’ve also seen capital disappear when stocks tanked, giving them less money to work with.
“In times when the macro uncertainty is so much higher than it was a year ago and the money is so much more expensive than it was a year ago, large investors gravitate toward the public markets naturally,” Schuster said. “Often liquidity is a big reason for that.”
Schuster pointed to Thoma Bravo’s choice to acquire Anaplan, a public company, as an example of a crossover investor taking advantage of lower public company valuations. The firm likely thinks Anaplan’s stock has run its course in terms of downside, so they see value in acquiring it, Schuster said.
Stepping up the pace
Some crossover investors have continued to increase their investing pace this quarter. That includes Tiger, which has done 131 deals in VC-backed companies in Q1 this year according to Crunchbase data, compared to 55 in the same period last year.
Where firms have sped up investments in private companies, it could be the case that they have mandates to deploy those funds.
“Many firms raised money for private markets last year, they have the money sitting in the accounts and they have to deploy it,” Schuster said.
Illustration: Dom Guzman
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