The Growth Stage Investing Bubble

If you’ve been following the VC landscape closely the past couple of years, you’ve noticed the increasing amount of capital deployed. Nowhere has this been more evident than in growth rounds (defined here as Series B and beyond).

According to the graphic below created by Pitchbook, you can see a clear trend since 2014 – increasing capital deployed coupled with lower deal counts. This combo only means one thing, deal sizes are getting larger….

….and capital is getting primarily deployed in the $50M+ bracket.

Source: Pitchbook

What began as traditional public equity players dipping into the private markets for increased returns (ie. Fidelity, Tiger Global, Wellington) has turned into an all-out race to compete with the largest check size (Softbank’s $93 billion Vision Fund and Sequoia’s $8 billion growth fund).

The Beneficiaries

This type of funding environment is music to an entrepreneur’s ears, and there have been countless monstrous funding rounds and corresponding valuation jumps. Here are a few recent examples:

DoorDash – Recently valued at $1.4 billion in March 2018, the company has since raised three(!!) rounds and is now valued $12.6 billion. How this jump in valuation is justified is anyone’s guess, but I am 1,000% sure some good old healthy competition among VCs angling to get a piece of the pie has played a major role.

UiPath – Recently valued at $1.1 billion in March 2018, it raised a subsequent round in November valuing it at $3 billion and just last month raised its latest round at a $7.1 billion valuation. Almost 7x valuation growth in one year, not bad.

Lemonade – Recently valued at $570M in March 2018 (I see a theme here), it has kicked off its next round of fundraising with $300 million from Softbank which will value it at $2 billion.

Rappi – Looking to become the go-to delivery service for Latin America, this company has been on a tear as it expands across the continent. Valued at $1 billion in September 2018, it just completed a $1 billion raise last month which likely values the company anywhere from $6-8 billion.

Going Public

How will the next batch of unicorns going public fare? If recent developments are in any indication, the jury is very much still out.

Source: WSJ

The chart above shows a slight correlation between capital raised as a private company compared to public market performance – the less capital raised, the higher likelihood of outperformance in the public markets among this company set. This makes total sense – companies that stay private longer accrue value for their private market backers and by the time they hit the public market, they have already tapped into their major growth markets/channels and prospects for similar growth going forward are dubious at best.

I believe the late stage funding environment has gone too far – after enough lackluster IPOs, late stage investors will eventually realize that they are playing a losing game and either retreat back to the public markets or the early stage arena. As with any market, when the pendulum swings too far in one direction, market forces eventually bring it back.

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