In venture finance, a small handful of folks get to write big checks in the interest of seeking even bigger returns.
How big are some of these VC rounds? Quite big. These days, if a startup needs to raise hundreds of millions of dollars, it’s not forced to do so from public markets in an IPO or direct listing. There are plenty of firms with newfound financial wherewithal to continue backing these ventures long past the point where tech companies from prior generations would have gone public.
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We’ve extensively documented the trend of startups raising $100 million or more in VC deals. In reference to the largest and brightest stars in the universe, we called these rounds “supergiants.” Supergiant deal volume peaked in July 2018, dropped a bit, and then leveled off as China’s once red-hot VC market cooled and the rest of the world picked up the slack.
An even more rarified category of VC deals, “hypergiant” rounds raising $250 million or more, exhibits a similar pattern: a slow uptick at the start before rapidly growing to a crescendo in Q3 2018, then dropping off at a slightly steeper pace than slightly smaller nine-figure deals.
Here’s what that looks like in chart form:
With roughly half of Q3 2019 yet to go, it’s likely that hypergiant deal volume will eclipse Q2’s figures, but is unlikely to match highs set last year.
Hypergiant VC: IPO-Scale Capital Without Public Market Scrutiny
A new class of very large late-stage VC funds are able to funnel capital into companies at a scale once only seen through initial public offerings.
SoftBank Investment Advisors, with its nearly $100 billion Vision Fund and a second $108 billion Vision Fund II in the works, is perhaps the most recognizable, given its propensity to splash cash everywhere (from pizza-making robotics, to car-sharing marketplaces, to smart glass window companies, and beyond).
A laundry list of other top global VC funds have raised later-stage venture funds of $1 billion or more since 2018. Who’s on that list? Sequoia Capital, Andreessen Horowitz, Lightspeed Venture Partners, Mary Meeker’s Bond Capital, Accel, New Enterprise Associates, Thrive Capital, Bessemer Venture Partners, Index Ventures, General Catalyst, and Norwest Venture Partners, among others.
The scale of capital inflow into late-stage VC funds is unprecedented, and it’s affecting the dynamics of the IPO market. Companies are able to delay public-market debuts until they’re more “fully baked,” and when they do go public some are raising truly eye-popping sums.
In the chart below we plot the average (mean) and median amount of capital all U.S.-based companies raised in their initial public offerings, by IPO year. (Note: We didn’t filter out companies without prior venture backing. Part of the reason 2018’s average is so high is the $24 billion re-listing of Dell Technologies. Exclude that transaction and 2018’s average IPO cash haul goes down to roughly $208 million.)
In 2018 and thus far in 2019, many companies with heaps of private-market backing sought to raise capital from public markets. (Finally.) With so much capital behind them, and so much still available in the private market, it seems like, in order to justify raising from public-market investors (and taking on the additional regulatory scrutiny from the SEC), startups with the most venture backing almost had to raise astronomical sums in their IPOs. These include massive 2019 offerings by Uber ($8.1 billion raised), Lyft ($2.34 billion), Pinterest ($1.4 billion), Zoom ($751 million), and others.
So, one impact of huge late-stage private rounds is the increasing amount of cash raised in later IPOs.
Hypergiant VC & Private Capital In Perspective
What to make of these largest private-market funding rounds? Without visibility into the finances of the companies securing capital of such massive scale, it’s tough to say whether, as a collective, they are raising privately because it’s their privilege to do so, or because they’d be unpalatable to public markets in their current form. As is the case with most things, it’s probably a little bit of column A and a little bit of column B.
There are certain advantages to raising capital in the private market. Details about the company’s finances are not publicly disclosed. This can take some pressure off of a business to move toward profitability, granting fledgling companies additional time to focus on growing the scale and scope of their business and, with it, their valuation.
To use a baseball analogy, in the financial model of VC, there’s little glory to be gained from singles and doubles. Many venture investors would rather a company strike out trying to hit a home run, because a sufficiently large portfolio of potential sluggers is bound to hit one out of the park eventually, and that’s where the surpassing majority of the returns are made.
Late-stage VC at this scale seeks to capture most of the financial upside in growing companies. In some cases, it works out. In others, like Uber, a large and richly-funded capitalization table fueled corporate bloat to match the company’s ambition, leading to nice markups in private rounds but disappointing performance on public markets.
“We’ll have to wait and see” is a trite way to conclude, but here it’s necessary. Many of the companies which raised hypergiant rounds in recent quarters likely have plenty of cash in the bank to burn. Whether they go back to the amply-filled trough of private capital to keep fattening up remains to be seen. Too big to get acquired by any but the very largest tech conglomerates like Microsoft, Alphabet, Apple, Facebook, or Amazon, many of these companies will have to lean out a bit and go public at some point. We have yet to see whether the hypergiant bets venture investors placed on these companies can ever pay off.
Illustration: Li-Anne Dias