Venture Capital firms are buying stock in public companies

This morning I had breakfast at the New York Stock Exchange, eating pastries at the epicenter of the capital markets after a particularly volatile week of trading.

I was there at the invitation of venture capital firm Lux Capital, which has listed 200-plus of its portfolio companies on the NYSE, including Aeva, Cerulean, and Latch. Generally, that’s the extent of the relationship that venture capital has with the stock market. A startup goes public, and its VC investors sell their shares and reap the financial benefit of an “exit.”

But these are not ordinary times. The markets are in distress, inflation is at a 40-year high, the supply chain resembles minestrone soup and we may be on the brink of world war. And VC firms are taking a new approach to the stock market.

As the Wall Street Journal reported on Thursday, a growing number of VC firms—including Accel, Lightspeed Venture Partners, Sequoia Capital, and Andreessen Horowitz—are buying shares of publicly traded companies.

For Accel and Lightspeed, it’s about re-investing in their portfolio companies. From a logic standpoint, it makes sense: Accel and Lightspeed have history with public companies like UiPath and GrubHub — they invested in these companies back when they were privately-held startups, and they have valuable insight into their businesses and operations. Buying their public stock is like curling up with a childhood stuffed animal when the hurricane hits. 

And VCs could use a bit of comfort right now, with the IPO market showing no signs of life. According to PitchBook-NVCA’s Q3 report, there have been fewer exits than any time in recent history.

What’s more wild is that VC firms Andreesseen and Sequoia are investing in public companies they did not invest in while they were startups, per the Journal. The two startup kingmakers have recently restructured to register as investment advisors, allowing them to own things other than equity in private companies—like public stocks. Sequoia has not yet revealed its public market holdings, but the firm appears to be thinking big. Pat Grady, a partner at Sequoia, told Wall Street Journal that the firm’s growth investors will dedicate about a quarter of their time to public market investments. 

The implications of venture capitalists quietly rebranding as plain capitalists remain unclear. The traditional VC model involves investing partners becoming intimately familiar with the companies and founders that they back, often taking board seats. It’s about personal relationships as much as anything else, since private companies generally get to approve who becomes an investor. That’s not the case with public companies of course, where anyone can buy shares. 

If VCs become multifaceted financial institutions, say Goldman Sachs for the Sand Hill Road set, how will the relationships between tech startups and their investors change? Does this mean that venture capitalists will dedicate more effort to clutching portfolio companies after public market debuts? 

Perhaps the biggest takeaway we can draw right now is simply that we’re deep in economic uncertainty, and VCs, like the rest of us, are just trying to make a buck.

Want to send thoughts or suggestions to Data Sheet? Drop me a line here.

Alexandra Sternlicht

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