Venture-Capital Firms Adapt as Stock Market Continues to Drop

In the past months, the stock market has seen the longest stretch of losses since 2001. (Tripp Mickle, New York Times). As investors adjust to the onset of a “bear market,” a market persistently declining in value, some venture-capital firms (“VC”) are changing their focus from investing exclusively within the startup industry to purchasing stocks of publicly traded companies. (Merriam-Webster; Berber Jin, Wall Street Journal). Inflation in the United States is at a 40-year high, and the Federal Reserve has continued to raise interest rates to combat it. (Nick Timiraos, Wall Street Journal). The market has been strained by the current interest rates, as well as the war in Ukraine, supply chain issues, and other factors. Id. The bear market’s impact has led to this shift of VCs investing in publicly traded companies, as the potential value in discounted stocks has become more appealing than the standard investment in riskier startups. (Berber Jin, Wall Street Journal). The shift does not come without fallout for the firms and for the startup community, which relies on the VC seed money.

The startup world is at a crossroads as it tries to adapt to the recent trend in investment strategies. (Heather Somerville, Wall Street Journal). Leading up to the pandemic, the market was heavily startup favored, with VCs competing to give top dollar to highly valued startups. Id. The competition drove firms to invest earlier in a startup’s life cycle, often handing out money before asking questions about business practices. Id. The market for startups thrived as the pandemic changed the way people went about their lives, such as ordering in food and buying more products online. (Heather Somerville, Wall Street Journal). The need for digital or remote alternatives to standard life, along with record low interest rates, propelled the market through the pandemic. Id. But now, the market is shifting and companies that grew rapidly during the pandemic are suffering some of the market’s biggest losses. Id. What once was a battleground for offering startups the most money, has now cooled to favor the VCs. This has allowed firms to better evaluate their return on investments by doing more due diligence on whether startups will survive the bear market. Id. The shift has also led to VCs directing already affiliated startups to change spending habits. (Heather Somerville, Wall Street Journal). One of Silicon Valley’s most high-profile VCs, Sequoia Capital (“Sequoia”), advised its startups to conserve money and find ways to prepare for the long haul amidst the bear market. Id.

Sequoia is also making changes as a firm to adapt, taking advantage of the lower prices of public shares of tech companies the firm previously invested in. (Berber Jin, Wall Street Journal). Sequoia doubled down on DoorDash Inc., buying up 573,500 shares of the stock. Id. But this change in strategy also comes with risks, as DoorDash Inc. has continued to lose value and Sequoia’s investment has dropped 40% since buying up the additional shares. Id. Secondly, firms are also taking the advantage of a second chance to invest in companies they wished they had previously invested in. Id. For example, Thrive Capital which did not originally back Carvana Co., took advantage of the opportunity to invest at lower share prices, buying 812,713 shares and then almost doubling that amount in the recent months. Id. Another top VC, Andreessen Horowitz, missed out on backing Block Inc., previously known as Square, at the private company stage. Id. The cofounder, Marc Andreessen, once stated it was one of his regrets. Id. However, the VC has recently remedied that regret by purchasing one million shares of the financial services firm. Id. These actions show that VCs see opportunity in high-profile, established public tech companies because of lower stock prices in the current market. This shift to investing in publicly traded companies has allowed firms to look at longer-term investments rather than the constricted startup investment approach.

            As VCs begin to invest in public companies, they are identifying a drawback to the standard model with investing in the startup industry at the private stage. VCs often sell positions in the private companies they have invested in within eight to ten years. (Alejandro Cremades, Forbes). VCs can miss out on long range investments beyond when the ten-year window has closed. Because of this, top VCs are beginning to break out of this norm and change their approach to a longer-term return goal and expanded focus on publicly traded stocks. (Yuliya Chernova, Wall Street Journal). Last year, Sequoia announced the firm had registered as an investment adviser with the Securities and Exchange Commission (“SEC”). (Ari Levy, CNBC). This follows Andreessen Horowitz, which registered as an investment adviser two years prior. (Lauren Feiner, CNBC).Typically, a VC utilizes an exemption from having to register with the SEC. (Ari Levy, CNBC). For Sequoia, the reason behind forgoing the exemption and registering with the SEC is a belief from its leadership that the 10-year venture fund structure was becoming obsolete and too constricting for the current market. Id. Registering was made in part to bolster Sequoia’s creation of an evergreen fund to manage and trade in public stocks, now the firm has the flexibility to move forward and invest in both start-ups and publicly traded stocks. (Yuliya Chernova, Wall Street Journal).

The moves align VCs more closely to hedge funds by providing more investment avenues. (Berber Jin, Wall Street Journal). For startups, the trend complicates their business plans, as they are forced to proceed more carefully as bidding competitions and market values fade. For consumers, the trend indicates some of the best investors in Silicon Valley believe the market will soon have a resurgence and now is the time to buy. This change by two of the lead VCs may be an indication of more firms following suit in order to have flexibility with investment opportunities. Like all consumers, VCs want the best deal available, which may now mean stepping outside of the outdated 10-year venture fund model, registering with the SEC, and buying into publicly traded companies during this lull in the market.