Lyft’s IPO, Big Returns, And Why Venture Is Still Hard

Morning Markets: Happy Lyft IPO day. That’s all that’s going on in tech this morning, so let’s talk about winners and costs.

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Last night Lyft priced its IPO at $72 per share, the high point of its raised range. The ride-hailing company had previously signaled an anticipated range of $62 to $68 per share. For Lyft, the capital-raising event was a success. Whether the float of its shares performs well comes next.

We’ll bring you notes about Lyft’s performance once it begins to trade.

But for a host of investors, Lyft’s IPO is already a welcome bonanza. The Information did yeoman’s work this week tracking the company’s venture backers’ various performance. The short version is that Lyft backers have done well, and its early investors did very well. 1

The venture model depends on runaway hits to pay for duds and more. Many venture investments return a fraction of their initial investment or nothing at all. The old saw that most companies fail is a worn cliche for the reason that it’s true. (A look at how the startup death rate works in practice can be found here, when your friends at Crunchbase News wrote under a different banner, the “graduation” rate between various venture milestones.)

A lot of folks just don’t make it. But as the Lyft IPO throws into contrast, when a company does very well, the wealth goes a long way.

Money In, Money Out

In the age of unicorns, a time when companies are getting larger than ever while private, do big exits mean that venture players are doing better than ever? Are hundreds of billion-dollar companies pushing venture results into the sky?

I don’t have a numerical answer for you this morning, but probably not. And for a few reasons. First, venture funds are holding onto investments longer than ever, as winning companies hang back from going public. This extends the time in which VCs hold investments on their books, lowering returns on a time-adjusted basis. (More on the time-value of money here.)

But that’s slightly small potatoes. Other factors tinkering with venture returns are competition (there’s a lot of it in the market today), and so-called “founder friendly” terms that investors must tolerate in today’s market to access the best deals.

Then there’s price. Fenwick & West put out an interesting set of data on the Q4 2018 venture market that I read this morning. Our first-quarter venture report starts dropping next week, so I took a peek. Observe this set of facts, condensed for our needs:

“Up rounds exceeded down rounds 81% to 8%, with 11% flat in Q4 2018 […] [with] an average price increase in Q4 2018 of 85%, an increase from the 71% recorded in the prior quarter, and the highest average price increase since Q3 2015.”

The Fenwick file goes on to state that “[s]tronger valuation results compared to the prior quarter were recorded across each series of financing.” So this isn’t just a late-stage or early-stage affair; startups are still getting more expensive.

I think that the normal venture game of needing smash hits to provide material returns to LPs then probably hasn’t changed much; bigger startups mean bigger exits, but bigger funds also mean larger denominators to levitate. Throw in the historical reticence of unicorns to go public (more here), and you’ve got an interesting, but still difficult mix of factors for investors to navigate while they pursue sufficient returns to raise their next fund.

Except, perhaps, for Lyft’s investors today. I bet they’ll take the whole weekend off from worrying about their next fund, so long as Lyft’s shares do well out the gate. More on that shortly.

Illustration: Li-Anne Dias