The shift marks a reversal for many firms, which had until recently been focused on better-established companies with more revenue and loyal customers.
Wall Street is becoming a bigger player in the tech startup scene, throwing gobs of money at companies, driving up funding rounds and creating outsized valuations.
Many of the biggest startup investments this year belong not to the storied Silicon Valley venture firms but to 401(k) managers such as Fidelity and behemoth financial institutions such as BlackRock. Their influx has reshaped the world of venture investing — as long as hedge funds target the startup world, according to venture capitalists and analysts, VCs will have to work harder to keep a seat at the table. Many have responded by investing earlier into companies — before the price of the rounds goes way up.
“Every top-tier venture firm is looking to go early and seed stage because those later stage rounds are just too large now,” said Venky Ganesan, a managing director at Menlo Ventures.
That shift marks a reversal for many venture capital firms, which had until recently been focused on better-established companies with more revenue and loyal customers, according to experts who track investments. Early-stage investments often carry more risks, and were also the most popular type of investment during the dot-com bubble — putting some VC firms in disconcertingly familiar territory.
In the third quarter this year, the largest venture capital fund, approaching $1 billion, belonged to multinational banking giant JPMorgan Chase & Co. Of the top 20 Silicon Valley tech investments last quarter, mutual funds and hedge funds were publicly disclosed as being involved in at least nine, according to the MoneyTree Report, a quarterly venture capital report produced by PrivewaterhouseCoopers and the National Venture Capital Association. The low interest rates on U.S. treasury bonds and the volatile public market, which has in the last month seen some of its worst days since 2011, have driven hedge funds to the private tech market, analysts say.
For tech companies looking to raise money and delay going public, the interest from big banks and hedge funds has been a boon. More companies — a total of 11 in the third quarter this year — are raising $100 million-plus rounds from these new investors, according to MoneyTree, which uses data from Thompson Reuters. Coatue Management, a New York-based hedge fund that’s invested in California tech startups, led a $158 million funding round for Los Altos storage company Box in the third quarter. In the last year, Coatue has also invested in Lyft, Snapchat and Lending Club.
Coatue declined an interview with this newspaper. Other hedge fund managers did not return phone calls or emails.
Since the start of the year, there have been more than 30 of these $100 million-plus deals, compared to 16 in all of 2013. The stand-out deal so far is car-service app maker Uber, which raised $1.2 billion in the second quarter from financial institutions Fidelity, BlackRock, and Wellington. “There’s a lot of competition in the deals and we’re going to see that continue,” said Mark McCaffrey, a software industry expert with PwC, a consulting and professional services firm.
But some worry what startups will do if those funds abandon them for other opportunities. Many VC firms have a lifelong relationship with the companies they invest in, but hedge funds have a more “periodic interest,” said Robert Stavis, a partner with Bessemer Venture Partners. “You have to have some concern. If you took (hedge fund money) for a pre-IPO round, your plan had better be to have them not show up for the next two financing rounds.”
While some are wary of the competition, others say hedge funds have helped larger companies grow so VC firms can focus on launching new startups.
“It’s been a positive for us,” Ganesan said. “It is increasing the number of new companies that are formed and increasing the chances of the next Google or Twitter coming out.”
For now, more hedge funds are flocking to venture investing. Maverick Capital Ltd., one of the oldest hedge-fund firms, said it plans to launch its first venture-capital fund in January that could top $400 million. Tiger Global Management, which has backed companies from Chinese Internet giant Alibaba Group to San Francisco startup Thumbtack, has begun raising a $1.5 billion fund for venture investing.
But as company valuations climb from huge funding rounds, some are asking how much is too much. Uber is now worth $18.2 billion — the highest-valued VC-backed firm in the world, according to Dow Jones data — and Nutanix, a data storage company in San Jose, more than doubled its worth last quarter to $2 billion after raising $165 million from Fidelity and Wellington.
“It’s a worrisome thing,” McCaffrey said. “And we have to be careful with it. These valuations are really, really healthy.”
©2014 San Jose Mercury News (San Jose, Calif.)