Lightspeed Venture Partners has raised $4.6 billion across two growth funds in 2022, the largest growth funds raised in its 22-year history, in a market where large fundings at high valuations have slowed significantly.
Now, the Silicon Valley-based firm founded in 2000 with offices around the globe just needs to decide how to spend it all.
We spoke with partner James Ephrati, who joined Lightspeed more than three years ago to create a practice around follow-on fundings. This reinvestment team is a new program which runs a fundraising bootcamp for portfolio companies to plan their next funding. The team has been involved in roughly 200 deals in three years—around 65 deals a year.
“My job is 80-20. I need to pick the winners,” said Ephrati, referring to the firm’s investment into portfolio companies. “That’s how I lose money, if I don’t double down into the right opportunities in our portfolio.”
One of these opportunities for Lightspeed was an extension round into Alloy, an identity verification platform used by banks and financial institutions. Lightspeed led the initial Series C of $100 million, which valued the company at $1.4 billion in 2021. A C-extension a year later in September 2022 added $52 million in funding with a $100 million valuation uptick at a $1.5 billion pre-money valuation led by Lightspeed Venture Partners and new investor Avenir Growth Capital.
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“We didn’t see it as just a bridge or an extension,” said Ephrati on the investment. Rather, Lightspeed’s investment answered a crucial question: Did the firm want to increase its exposure in this company? The answer in the case of Alloy was yes.
Ephrati’s reinvestment team plays a crucial role in such decisions. The team’s goal is twofold—“to work with founders as thought partners on their journey to build a large business,” said Ephrati, and “to independently challenge the follow-on decision and the growth investment that we make.”
The three-person team supports portfolio companies by honing pitch decks, building a data room, benchmarking performance, stress-testing operating plans, and ultimately brokering introductions with investors. The team typically looks two years out. Further out is more difficult to predict as you are not able to control all the variables, said Ephrati.
Prior to this most recent fund close, the firm has spent around $3 billion in growth dollars over the last two years with around 60% of that committed to portfolio companies.
2021 in hindsight
Last year, as public markets traded high, private valuations trended up as investors deemed private companies on par with the market.
And fast decision-making was at a premium.
Growth investors could basically look at three to four key performance indicators, Ephrati said. What’s your growth rate? How much are you burning to achieve that growth rate? What is your sales performance or your go-to-market efficiency? And then what’s your net retention? A company’s answers to such questions, along with customer interviews, help investors make their decision.
All those rounds in 2021 valued at over $5 billion are sparking concerns today, Ephrati said. Investors are fretting that some of these companies are not close to the growth trajectory of publicly traded companies in their space. Examples of fast-growing public companies include restaurant management platform Toast (valued at $8.9 billion), customer engagement platform Braze (valued at $3.3 billion), and product intelligence platform Amplitude (valued at $1.6 billion) as of Sept. 23.
Such concerns mean that many highly valued private companies will need to fix the burn or accelerate growth to meet investors’ expectations.
What to do in 2022?
After a searing 2021, this year will demand different strategies for both private companies and investors like Lightspeed.
“There’s just been a huge wave of companies asking for extension or convertible notes in order to kick the can down the road, because no one is able to price accurately right now,” said Ephrati.
One of the questions Lightspeed has to answer is whether to invest another $30 million in a particular company at a $5 billion valuation, knowing that few companies go public above $20 billion. The team will model 4x to 5x return on growth investments.
Despite the changing market, Lightspeed’s model for assessing companies remains the same in 2022.
“I think we’re just more price conscious,” said Ephrati.
In a funding environment where public market comps are down significantly and funding has slowed, “I think we’re doing a great job making deals happen versus waiting for deals to happen,” he said.
Crunchbase Pro queries relevant to this article:
- Lightspeed Venture Partners – Series C+ rounds since 2021
- Lightspeed Venture Partners Series B+ Led Fundings Since 2021
Illustration: Dom Guzman
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