Investors Are Increasingly Shifting Their Attention Away From Private Shares To Public Stocks

Investors are increasingly shifting their attention away from private shares to public stocks

The entry of a large number of public market investors into the world of venture-backed startups began more than a decade ago, and the consequences were obvious. Consider the following: faster funding rounds across the board, increased valuations, and venture capital firms raising increasingly larger funds rather than ceding territory to newer competitors as a result of this trend.

Naturally, a sell-off by the same, now massive, group of crossover investors could have equally dramatic ramifications for the stock market. For example, the markets have already lost billions of dollars in market capitalization for a wide range of publicly traded technology stocks, making richly valued startups appear somewhat less compelling when compared to the overall picture. One term sheet that was offered to a London-based crypto infrastructure company was pulled last week by one of the most prolific investors in recent years, according to one source familiar with the situation. In the absence of another abrupt market reversal, it is almost certain that this will not be the last term sheet to be retracted.

Founder of his own 12-year-old crossover firm, Lead Edge Capital, Mitchell Green says, "You can bet your bottom dollar that every investor in Coatue, Dragoneer, D1 [Capital Partners], Tiger, and those other crossover funds is currently finding more value in the public markets than in the private markets."

Green's team is also shifting its priorities. Lead Edge is primarily a growth equity fund, with assets under management of $3 billion at the time of writing. According to Green, under the terms of its agreement with its investors, it is only permitted to invest up to a quarter of its capital in public equities, and these companies "tend to have market capitalizations of less than $10 billion." For example, some of the firm's portfolio companies include Spotify and Alibaba, as well as Duo Security and ByteDance.

The market is currently "giving us better value values in the public markets than in the private markets," as he points out, prompting Lead Edge to increase its holdings in public companies in which it already has positions as well as to initiate new positions as a result of the current market conditions.

The company's public-only fund, which it manages on the side and raised last year to provide its limited partners — many of whom are wealthy former and current operators — with additional public market exposure is also becoming more important to the company's operations. "Six or seven companies; we've been buying stuff," says Green, referring to the vehicle's capital commitments of approximately $150 million, which held four positions a month ago and now holds shares in "six or seven companies."

The crucial question is how long public company shares will be available for purchase and how long still-private startups will be able to sustain their operations. While the prices of the public and private markets are correlated, the private market typically takes time to catch up with the public market. In fact, the most recent public market downturn, which occurred in March 2020, was so brief that it had little impact on startup valuations, except for those who had the misfortune of attempting to raise capital during that time period, which was a small number of companies.

"Prices really haven't come down yet," Green observes, despite the fact that the major US stock indexes have fallen between 6 and 13 percent this month.

To be sure, not all of them have been demolished. Green adds that he is aware of "negotiations" between investors and growth-stage companies in certain instances. His explanation is that he has detected rumblings. Meanwhile, according to The Information, Tiger Global has been actively lowering expectations in recent months. As reported by the outlet, Blockdaemon, a New York-based blockchain infrastructure company focused on node management and staking, was asked to accept a 20 percent valuation cut before Tiger Global recently wired money to Blockdaemon. In fact, Blockdaemon insists that the transaction was not renegotiated.

As a result of the sell-off in publicly traded technology stocks, Tiger Global requested a price reduction on a Series C deal for Estonia-based identity verification startup Veriff, according to the outlet.

Early-stage companies will be squeezed even further if public stock prices continue to decline.

"I believe that a lot of growth equity funds are unable to do a great deal more in the public [investment] markets, but they wish they could," Green says. The ability to do more, according to "those with the ability to do more" — which includes a growing number of firms such as hedge funds, mutual funds, family offices, and deep-pocketed venture firms such as Andreessen Horowitz — "is something that I believe is being examined right now."