It looks like Chamath is not done with his ‘blank-check IPO’ play on escape velocity, relative marginal escape velocity and late-stage liquidity for LP and GP. ‘Blank-check’ IPO essentially consolidates public capital into a private vehicle. Per this latest SEC filings, he is looking to raise $1.0B cash for his vehicle. https://www.sec.gov/Archives/edgar/data/1735980/000173598018000001/xslFormDX01/primary_doc.xml
A few investors are pointing out a potential systematic shift in how venture capitalists raise capital and the role they play in our financial systems. my simple perspective below:
Old VC Financing System
- Raise several relatively medium-sized capital from LPs and institutional (ranging from $100-500M per round)
- Deploy capital and create value over the next 3-5 years (or 10 years+ in Chamath’s Social Capital case)
- 5% / 20% / 75% of portfolio delivering 400%+ / 150% / < 100% unlevered return
- < 5% of the portfolio goes public
New VC Financing System
- Raise capital from institutional and corporate. A lot of real massive rounds now. Social raising $1.0B, Sequoia US and Sequoia China raising like $18.0B soon, General Catalyst just did $1.4B round a few weeks ago, Khosla Ventures founded by the “Bill Gates” of the 80’s just did $1.4B as well.
- Deploy capital and create value over a longer duration given more capital to deploy
- Traditional VC return planning strategy might be adjusted as a result
- A small handful of portfolio companies will raise $ via strategic investment route from traditional corporations and less will go public
There are many plausible theories behind this potential systematic shift in venture capital/startup investing, but one highly plausible one is the growth in the concentration of capital and money in our financial system. Right now, capital is highly concentrated in those publicly traded corporations and relatively less so on individual market players/individuals/pension/mutual fund (who at the end of the day pushes IPO and public stock price further. Banks acts as the price stabilizers at first but mutual funds and pension funds, which are essentially individual’s capital, contributes to incremental price gain in our equity market).
Also, a few US companies are starting to engage in similar strategies of investing in the upstream and downstream of your product supply chain and pipeline like Chinese venture capital and startup firms.
A few of these mega-rounds of financing in the US VC world could very well be attributed to acquiring capital before liquidity and new credit creation slowly dries up in our financial system and invest in the ‘risk reset’ time period. After all, historically, most generational defining startups are created in dire capital time (Airbnb, Docusign, Dropbox, Uber, Pinterest, SurveyMoney, MongoDB, VICE, Stripe, and WeWork were all founded between 2008-2011, from GFC to US credit downgrade time in 2011). The probability of inefficient deployment of venture capital increases exponentially, not linearly, when access to capital is easy. Maybe one of the new investment mandates is to invest capital in the relatively illiquid financial time frame (so with that being said, capital raise should precede that time frame).
But having that bag of money early on looks and smells addictive, but one might have to wonder if there is enough capital in our global financial systems to deliver and absorb the necessary return for these mega-financing round, or like they say, you don’t want to be the ‘bagholders’ left ‘holding the bag’. If you raised a $1.0B and you need a 5-year weight absolute on portfolio return of 450% and assume an 20% average ownership, then your portfolio companies need a total valuation of at least $25.0B or more like $35.0 – $40.0B post dilution rounds. If you do a equal weighted average of these portfolio companies, then each might need to valued at $2.0 – 5.0B, which by the way, is on par with the average valuation of US publicly traded companies. Perhaps, the convergence between public market and private capital/venture capital market is coming sooner than later or never.
Intersection notepad 