VC investments in Listed Equity

Lately, we observe that venture capital funds are buying listed equity shares after technology firms got beaten down in the recent correction. Thrive Capital bought shares of Carvana, a16z bought shares of Block, and GGV Capital bought shares of HashiCorp.

It would be hard to comment whether this is/will be good for VCs or LPs in those VC funds. However, we can develop a framework to assess this phenomenon and we will see towards the end as to why it is difficult to arrive at any firm conclusion. This is reverse of the trend that we have lately seen where large public market funds are investing in private assets either in their pre-IPO rounds, late-stage growth rounds, or growth rounds. The logic that motivated public market funds to go upstream is also driving the VC funds to go downstream, the logic of taking advantage of valuation mismatch. As private assets remain private for a long time due to abundance of capital in the private market, most of the value creation in the companies happens before they become public. As a result, the valuations of private assets are huge at the time of listing and public investors’ potential upside from the listing price is limited. To get exposure in these high growth assets before they became public motivated public market investors to go upstream, the idea being to play the valuation advantage game. On similar lines, during market uncertainty, valuations of listed equities take a beating much faster and sometimes more than what is warranted. Valuations rebound quickly also when signs of recovery emerge. Between the time when the valuations collapse more than warranted and the valuation rebound, VC investors are looking to take advantage of this market dislocation. Now, the question remains – how quickly valuations will rebound because if there’s a delay in recovery then the capital which was meant to be invested in VC asset class remains invested in listed equity asset class, which might impact the VC fund returns over a long term.

There are a few relevant dimensions in which VC funds and public market funds vary. The advantages and disadvantages of this new phenomenon should be judged by keeping these dimensions in perspective. Also, soe of these dimensions are under VCs control and some are not. Below is the summary table of the dimensions and the advantages and disadvantages that I thought were relevant.

The big picture questions that will be worthwhile asking can be categorized into 3 categories:

LP-GP relationship:

1. How will the LP-GP relationship evolve over time?
2. How much capital will LPs allow GP to invest in listed equities?
3. Will LPs allow VC to have a separate capital pot for listed equity investments, or will it be more opportunistic in nature and will require Limited Partners Advisory Committee (LPAC) approval?
4. Is this phenomenon just a one-time event or will this event catalyse more such instances and will become a normal practice?
5. What new challenges will this bring for LPs – compensation, fund returns benchmarking, team selection, etc.?

Investment strategy

1. Will GPs set up a different team to invest in public markets to leverage their understanding of early and growth stage companies through which they have access to lot of granular operating metrics and trends?
2. What % of the fund will be dedicated to listed equities investments?
3. Will this phenomenon lead to new breed of VC funds which will invest in a very narrow of market segment but wide range of stages (from early stage to post IPO)? For e.g. VC funds which will invest in just B2B SaaS
4. Can the VCs have an edge over traditional public market funds?

Investment funds landscape

1. How will the funds landscape change – as more public market funds are looking like VC and PE funds, will more VC funds look like PE and public market funds?
2. What kind of talents will these funds seek and how will the compensation benchmarking and metrics change?