A lot of public market investors began elbowing their way into the world of venture-backed startups roughly a decade ago, and the ripple effects have been obvious. Think faster funding rounds across the board, higher valuations and venture firms that have raised increasingly bigger funds rather than cede territory to their newer rivals.
Of course, a pullback by that same, now massive, group of crossover investors could have dramatic ripple effects, too. Already, the markets’ sudden downturn has knocked off billions of dollars in market cap for a variety of publicly traded tech stocks, making richly valued startups just a little less compelling right now in comparison. 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. Surely, it won’t be the last term sheet that gets pulled back absent another abrupt market U-turn.
“You can bet your bottom dollar that every investor in the Coatue, Dragoneer, D1 [Capital Partners], Tiger — those crossover funds — are finding more value right now in the public markets right now than they are the private markets,” says Mitchell Green, the founder of his own, 12-year-old crossover firm, Lead Edge Capital.
Green’s team is itself shifting focus. Lead Edge is mainly a growth equity fund — one with $3 billion in assets under management currently. It’s only permitted to invest up to a quarter of its capital into public equities, per its agreement with its investors, and these outfits “tend to be sub $10 billion market cap companies,” says Green. (Some of the firm’s highest-profile portfolio companies have included Spotify, Alibaba, Duo Security and ByteDance.)
Normally, that doesn’t feel like a constraint, but right now, the market is “giving us better value values in the public markets than in the private markets,” he notes, which is driving Lead Edge to buy up shares in public companies where it already holds positions, as well as to initiate new positions.
For additional firepower, Lead Edge is also turning increasingly to a public-only fund that it runs on the side and raised last year to give its limited partners — many of them wealthy former and current operators — more public market exposure. That vehicle, which has garnered roughly $150 million in capital commitments, says Green, had four positions one month ago; now it owns shares in “six or seven companies; we’ve been been buying stuff.”
The big question is how long public company shares are on sale, and how long still-private startups hold their ground. While public and private market prices are correlated, it usually takes time for the private market to catch up. During the last public market downturn, in March of 2020, stock prices rebounded so quickly that they ultimately had little impact on startup valuations, save for those that might have had the misfortune of trying to fundraise through that period.
While major U.S. stock indexes have dropped between 6% and 13% this month, “prices really haven’t come down yet,” says Green.
Well, they mostly haven’t come down, seemingly. Green adds he’s aware of “negotiations” beginning to play out between investors and growth-stage companies in some cases. “I’ve heard rumblings,” he says. Meanwhile, according to The Information, Tiger Global has already been actively managing expectations downward. The outlet reports, for example, that before Tiger Global wired money recently to Blockdaemon, a New York-based blockchain infrastructure company for node management and staking, Blockdaemon was asked, and conceded, to a 20% valuation drop. (Blockdaemon denies that the deal was repriced.)
The outlet says that late last year, Tiger Global also asked to lower the price of a Series C deal for Estonia-based identity verification startup Veriff after noting the sell-off in public tech stocks.
If public prices keep falling, more growth-stage companies look to get squeezed.
“I think a lot of growth equity funds probably can’t do a lot more stuff in public [investing], but wish they could,” says Green. “I do think that those that can do more” — and that’s now a lot of firms, between the hedge funds, mutual funds, family offices, and deep-pocketed venture firms like Andreessen Horowitz — “are looking at a lot of stuff right now.”