The surest sign yet that all these late-stage mega deals really are private IPOs
A few weeks ago, I wrote about Chinese ride-sharing giant Didi Kuaidi showing off just how much money it could get from its ginormous backers-- Tencent, Alibaba, Softbank and other hedge funds and mega-Chinese institutions-- by making an investment itself in fellow Asian Uber-spoiler GrabTaxi.
I remarked that I couldn’t remember seeing startups do that before. About the same time I wrote those words, it was apparently becoming a meme. CB Insights has published a report detailing 14 other cases of it-- and many of them are also Asian super-startups.
From the report:
Backed by big war chests, “unicorns” including Flipkart and Didi-Kuaidi, have participated in startup financings this year (in some cases, co-investing with their own investors). Others have partnered with their venture investors to launch investment funds. These include SkyFund, from DJI and Accel Partners; and TwilioFund, from Twilio and its venture investors DFJ, Bessemer Venture Partners, and Redpoint Ventures. Expensify, an automated expense-management startup backed by $25M in VC funding, actually launched its own corporate venture unit, Expensify Ventures, in July.
There are really two trends here. Things like Expensify Ventures are just silly. Those companies need to focus on what they do well, and let the rest of the ecosystem do the rest. They don’t have the cash or dedicated manpower to be value added investors. Larger publicly traded companies have failed at operating their own venture arm. There’s no shortage of venture capital for good companies in the Valley. If these “funds” are just investing in things that wouldn’t get funding anyway, that’s an indictment of the quality of the deals right there.
But decacorns investing directly off their balance sheet into one-off strategic deals is something else. Something we haven’t seen private companies do before. And something that signals another change in the late stage private ecosystem if it continues.
This obvious commentary of this trend is: Good God do these startups have too much money! Not content to aggressive buy customers, provide outrageous perks, take money off the table pre-exit, or just build a cash hoard for a rainy day, these startups have decided they have absolutely run out of things to do with the money in house and the best use is investing it in someone else. What?
But more than that, it signals something else: The clearest indication yet that these late stage super-mega rounds at decacorn valuation prices really are just private IPOs.
Historically, there are a few reasons companies decide to embrace all the pain of going public. First, the cash. The amount you could raise from an IPO and private long ago stopped being meaningfully distinct. Several of these companies have raised $1 billion in a single round of private capital. Indeed, the very people driving these rounds up are the same investors who used to buy into IPOs: Hedge funds and mutual funds and in some cases banks like Goldman Sachs who offer the shares to their wealthy clients.
Second, the free press and marketing that comes with a big IPO. These mega-private companies are such consumer phenomenons that they hardly need that, but even if they did these mega-rounds get just as written about in the financial press.
Third is liquidity for early investors and founders: Check. Almost all late stage rounds include some options for partial liquidation these days. Thank Mark Zuckerberg and Yuri Milner for changing the game on that one. Sure you can’t buy and sell shares immediately. But that’s to an entrepreneur’s advantage.
A CEO of a publicly traded company recently told me something seeming obvious that is actually a profound difference between the two jobs: When you are still private, none of your investors have a vested interest in you doing poorly, but when you are public, short-sellers do. When you are private you can pretty much ignore any investor who doesn’t own enough to warrant a board seat. When you are public, a Carl Icahn can own 1% and make your life miserable.
A late-stage private company gets the best of both worlds: Liquidity but not too much liquidity.
The only other reason companies have historically gone public is to have a currency with which to easily do acquisitions, whether it’s stock or easily tapped cash. Here again, Facebook started this trend on the acquisition front, aggressively acqui-hiring and even doing a mega-deal pre-IPO with Instagram. That’s become common now, but before Facebook private-to-private transactions were seen as a headache and something only to be entered into if both companies were struggling.
This is an extension of that trend and it’s fitting. Increasingly, large publicly traded tech companies have increasingly started investing directly in private companies, and since these large privates are essentially the same thing, they are following suit as well. It’s a sign of confidence of just how much cash they believe they’ll continue to have access to.
It’s not a surprise the trend is the most pronounced in Asia-- nine of the 15 deals, with Xiaomi doing six of those. In Asia, corporates represent 30% of every “venture capital” dollar invested. Expect to see more of that: Elsewhere on Pando today, we reported rumors are that Xiaomi is raising yet another round of capital at a valuation that puts it once again ahead of Uber. Snapchat is the only US company to make a direct investment so far, but tellingly it shares a lot of the same hedge fund and Asian corporate investors with that crowd.
Are these deals smart for the companies getting the capital? It depends. Taking cash from corporate investors is always dicey. They’ve been criticized for giving big companies a way to spy on the little guys and an option to buy them later, with the startups getting little in return.
At a high level, it appears that a lot of these deals are smaller companies who are augmenting the larger company’s ecosystem with bolt on services the bigger companies may rather buy than build out. That makes sense for many of the big guys, and it may well be a savvy use of essentially free capital. But for the little guys, strategically relying heavily on another company to be a partner that never turns around and competes with them may be more dangerous than taking the cash itself.