Inside DCM’s Record IPO Streak

Venture capital firm DCM is coming off the best two-year public exit streak in its 25-year history, thanks to a hot IPO market in the United States and the firm’s strategic investments abroad.

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The Menlo Park-based firm says it has generated a 61x return on investments that have gone public in the past two years. From approximately $260 million invested, the firm’s stake across the public companies is now about $16 billion, according to DCM.

“We haven’t seen anything like this,” DCM partner Kyle Lui said. “The vast majority of our IPOs have been U.S.-based companies, I think partly because we have a large portfolio and partially because companies are taking advantage of the activity in the markets.”

DCM co-founder and general partner David Chao has a background in business in Asia, so the firm began investing in China and Japan in the 1990s and opened offices there in the early 2000s. The largest return in the firm’s history was a China-based company, Kuaishou, according to DCM.

In the past 24 months, 14 combined IPOs and SPAC deals, both completed and in the works,  have come out of DCM’s portfolio. 

Kuaishou is the standout, with its market cap to entry valuation at 2,000x. DCM led the company’s $20 million Series B raise in June 2014. Kuaishou’s entry valuation post-money was about $80 million, and the company now has a market cap of about $160 billion. 

I first connected with DCM partner Lui last month when online video platform Kuaishou went public and saw its stock close 161 percent above its IPO price on its first day of trading on the Hong Kong stock exchange. I spoke with Lui again last week to chat about what he called “the most meaningful streak of notable exits,” in the firm’s history, and how its own IPO track record ties into what’s going on in the markets more broadly.

This interview has been edited for length and clarity.

On DCM’s record 2-year run

For the companies included in this big two-year streak, how long on average have you been an investor?

Lui: I would say on average it was probably around five to six years, but it drastically varies. If you look at Bill.com, we led the Series A  in 2006, that was at a $7 million post-money valuation, the market cap is now $13 billion, and they went public in December of 2019. So that was a 13-year journey. Enovix, which announced last month that it’s going public through a SPAC — we led the Series A in 2007. And on the flip side, companies like Hims: We invested in the Series C of Hims in early 2019, so that was two years. 

And then another company that recently announced an acquisition … DocSend announced on Tuesday (completion of its acquisition by Dropbox); we led a Series A round in 2018,  so that’s been three years. 

You mentioned that you’re finally seeing your efforts to invest more internationally really materializing. Could you tell me a little bit about how much the firm’s efforts to invest internationally have affected your portfolio outcomes? 

Lui:  Yeah, absolutely. I know we spoke about this just a few weeks ago, but it would be remiss not to highlight our investment in Kuaishou again. We led the Series B in 2014. My partner, Hurst Lin, who is the co-founder of DCM China, sits on the board and we’ve invested cumulatively about $50 million in the company through the IPO. Our stake is now (worth) $13 billion, which represents a 260x return. In context, we believe this is one of the top kinds of early-stage venture returns in recent history, surpassing Accel‘s stake in Facebook at IPO, and Sutter Hill’s stake in Snowflake at IPO. 

That one (Kuaishou), I think is the biggest return in DCM’s 25-year history. I think we really have a testament to how the international part, and particularly our success in China, has played a very meaningful part of the overall success story for DCM globally.

On investing globally

On average, what percentage of your investments go abroad and how much stays here in the U.S.?

Lui: We’re currently investing about $880 million of capital: $780 million in our DCM Fund IX, which is our flagship fund, and then $100 million for a global seed fund, which is a Fund III.

So across the $880 million nowadays, about two-thirds of our capital is going internationally, and then about a third is kind of more North America.

On the state of public markets

Can you tell me in the greater context of the global markets, what your IPO streak says about the state of the public markets now? 

Lui: Interestingly, if you look at even just the last six months, we’ve had eight companies either go public or announce that they’re going public. That’s something we have not seen in our history and it really is just showing the kind of active — very active — public markets. The window is certainly open. 

The SPAC trend has been growing exponentially. And many of our companies have gone public or are going public through a SPAC. We’ve had two completed — Shift and Hims — and we have four in process: SoFi, PlayStudios, Matterport and Enovix. And this is all within the last six months. 

So we haven’t seen anything like this. The vast majority of our IPOs have been U.S.-based companies. I think partially because we have a large portfolio and partly because the companies are taking advantage of the activity in the market.

Going into that a little more; you said these companies are taking advantage of the activity in the markets. Can you give me some insight as to why it’s such a good time to go public? I see it every week when a tech company goes public: their stock skyrockets, they’re very well received. This isn’t specific to DCM, but can you tell me why the markets have been just so receptive to tech companies recently? 

Lui: We really see this as a global trend. I know that we’re very focused on the U.S. capital markets. Where we sit, we’ve seen record activity given low interest rates, the optimism in the future state of the economy, and coming out of the pandemic. I think that, combined with tech really becoming mainstream last year because any company that was software-based or technology-enabled had a big positive reception from the markets. 

Whereas those that did not leverage technology, kind of fell further behind; I think that is reinforced in 2021. But going back to the global side, we’re seeing this, not just in the U.S. but also in China, Japan, and other markets as well, where technology investments, high-growth investments, are really well received in the global capital markets. 

Has this two-year streak made DCM want to adapt its strategy at all or keep plowing forward since things seem to be going really well? 

Lui: We’re going to double down on our existing strategy. We are — we’ve always been — for the last few funds, very global, so we’ll continue to double down on our core markets, which are the U.S., China, Japan. 

But we have a very global outlook. Our team also looks at companies beyond our core markets, and we like to continue to look at these global trends, whether it’s Southeast Asia, India, Europea, the EMEA region or Latin America. We actually have looked at or done deals in all of those markets. And we’ll continue to look at markets beyond our core from a global basis. But in terms of just the way our investment strategy works, all deals kind of pass the global investment committee.

Out of all the big returns from the past two years in your IPO streak, which one stands out the most to you?

Lui: I would say actually that there’s one to two notable ones in each market. I already mentioned Kuaishou in China; that’s our largest return in our entire history. 

In Japan, we are investors in a company called Freee, which is now a $4 billion market cap company. We led the seed round at $3 million post-money, and over time have invested $20 million. Our stake in Freee is worth north of $500 million. And then in the U.S., there’s two standouts, both of which involved my partner, David Chao. One is Bill.com, which went public in December 2019, and is one of the best performing fintech stocks of last year that returned about $1 billion for us off of a $26 million investment.

And then the other is SoFi, which is notable for a few reasons. One, it’s a large consumer brand, one of the earliest to move into the neo-bank, digital banking space, starting with digital, one of the most notable which would be going public through a SPAC. I think SoFi certainly had the metrics and brand to go public through a traditional IPO, but chose the SPAC route because of the speed. 

On the rise in SPACs

What’s your take on SPACs. Were you expecting this trend?

Lui: We started embracing the SPAC trend maybe a little bit earlier than other traditional venture firms. I think that’s a testament to the diversity of our portfolio companies. We actually had a global offsite in Latin America in 2019 where we had a deep dive on SPACs and really kind of looked at that as a potential trend, very early.

It wasn’t something we unanimously embraced at the time, but we started studying for our portfolio companies. Shift was really the first amongst our portfolio to embrace it. That was announced in the middle of 2020, but (Shift) started (working on the SPAC) in early 2020. … The thing that’s been really remarkable to me has been the explosion of SPACs in the last few months. If you look at 2021, there have been more SPAC raises than in the entirety of 2020, which was already a record year.

So, it’s a really remarkable trend. Now, the question is: Are there enough great targets for these SPACs? Only time will tell. There’s a saying that too much of a good thing is not necessarily good, so I think that over time it will moderate. But certainly right now, it’s a very, very hot trend, and one that’s worth studying for any of our portfolio companies thinking about potential liquidity in the near term.

I think there are two types of companies in particular that we think are uniquely well suited for SPACs. The first category tend to be capital-intensive high-technology companies, ones that have clearly differentiated IP . And I would put a Enovix in that category, where the ability to raise hundreds of millions of dollars to get to full commercialization significantly de-risks the kind of technology risk here as well as the go-to-market risk.

The second type are those that have had very strong, recent growth and may or may not have been around for such a long time that it takes 18 months to go public. I would put Matterport in this category; it really had an exceptional 2020 with its product becoming mainstream. A combination of people were at home, they (Matterport) focused on a lot of activity in the real estate market and Matterport’s growth really signaled an opportunity to maybe get into the public market sooner with this phenomenal, but relatively recent, growth. 

Do you have a preference for IPOs vs. SPACs for your portfolio companies, or do you think it depends on the company and its situation?

Lui: I generally advise my startups not to go public until they’re fully ready. And that’s a combination of, ‘Is the business ready? Is the management team ready?’ The public markets are infamously unforgiving, so you need to make sure the companies are really ready and have that predictability. The exception to that being the high-technology companies I mentioned, where the public markets know what they signed up for. They’re maybe looking longer term over a horizon of one to three years for these companies to really realize their vision. But for companies outside of that, you really have to be ready and the SPAC transaction is just an acceleration of (going) public. 

Illustration: Dom Guzman

Editor’s Note: This article was updated to reflect the correct spelling of Kyle Lui’s last name. We regret the error.