How VCs can beat the giants that are dominating late-stage deals

Large asset managers’ participation in venture capital deals is nothing new. But it has only grown in recent years, and non-traditional investors are now going downstream even more, participating in outsized seed deals. The competition that has emerged will likely impact VC for years to come.

What was once thought of as an interesting trend worth watching is now the new normal.

Tiger Global, Coatue, BlackRock and other large asset managers are not just tourists participating in assorted highly valued, late-stage companies. They’ve become the main source of capital, boosting the presence of mega-deals, especially in the US.

Mega-deals of $100 million-plus in size reached a record high total of $85 billion, signaling a larger concentration of capital ever recorded in venture.

John Gabbert, founder and chief executive of PitchBook, says that as mega-deals become more common, particularly in the US, non-traditional investor participation in VC has become standard.

To be fair, seeing non-traditional investors in venture capital deals – or the increasing role hedge funds, private equity and mutual funds inhabit – is not a new phenomenon. Large asset managers have existed long before the venture industry’s record-setting moment of the last few years. In fact, crossover investor Coatue was already pouring money into late-stage deals when it hired former Amazon and Facebook exec Dan Rose to lead its venture unit in 2019. And even before SoftBank began deploying its near-$100 billion fund in 2017, hedge funds have dabbled in venture deals for decades, though typically at the later stages.

So it was eye-opening in early May to see San Francisco-based Blair, which provides a platform for schools to finance students, raised a seed-stage financing of $6.3 million, with Tiger Global leading the round. Tiger Global normally doesn’t enter seed deals.

But the New York-based crossover investor, which puts money to work in public and private companies, has invested in venture rounds at a dizzying pace in 2021.

In fact, Tiger Global has led the way with large investments worldwide, pouring $26 billion into 143 rounds, for an average of $181.8 million per round, according to a report from FactSet. Sequoia Capital’s China arm, Sequoia Capital China Advisors, followed with 98 investments amounting to $14.5 billion. In addition, parent firm Sequoia Capital made 77 investments in the first half for $13.7 billion.

Coatue participated in 68 rounds for a total investment value of $12.9 billion, according to FactSet.

BlackRock, the world’s largest asset manager, is also pushing more aggressively into private market investments. This is partly a result of interest rates getting cut to near-zero across the globe at the start of the pandemic, pushing investors to seek out other sources of yield. In a June investor presentation, BlackRock said that venture and other alternative investments offer a market-beating edge.

To be sure, the decline of public markets, whose market share has been cut in half since 2000, has had an effect on the growing demand for private companies by Tiger and other crossovers. But the increased presence of non-traditional investors has been long thought to be cyclical.

“My history has been that those [non-traditional investors] come and go, no matter how much they try to say they don’t,” David York, founder and managing director at the fund of funds Top Tier Capital Partners tells Venture Capital Journal. “Their DNA is they’re market animals, not company building.”

York, who has spent 25 years in the venture industry, watching crossover investors ebb and flow, credits some of their presence to the ideal market conditions for start-ups taking place right now. Also, many VC-backed companies are eager to access capital markets, highlighted by the heavy presence of so many crossovers in late-stage rounds.

David York

“Now everybody’s doing it, and everybody has a little spin on their value-add. The distribution of value-add is pretty similar”

David York
Top Tier Capital Partners

But as 2021 continues to break all records and projections set for VC dealmaking and non-traditional investor participation, they’re helping to transform the market for traditional VC investors.

“While the hedge, mutual and PE fund tourists appeared in the 1999-2000 bubble, this time it’s possibly more sustainable,” says Brian Smiga, co-founding partner at Alpha Partners, an expansion-stage investor. “Why? Because companies stay private three times longer and grow 80 times more valuable before their exits. We’re still in the early innings of all this.”

Current participation

Last year, an estimated 3,301 deals received investment from a non-traditional participant, accounting for 81.8 percent of 2020’s activity and representing $115.9 billion in deal value, according to PitchBook data.

Since 2013, the number of non-traditional investors as defined by PitchBook has doubled and has continually surpassed the 3,000 mark for the last three years.

But it’s not necessarily the level of participation from these institutions that is skyrocketing, as there have been modest increases in participation relative to the amount of cash they’re deploying. It’s the deal value itself, quarter by quarter, that is also soaring to new heights.

Non-traditional investors, who until now have largely concentrated their efforts toward late-stage deals – partly because of their expertise in accessing capital market options – have driven up deal values in this market sector beyond precedent. Median late-stage deal size with non-traditional investor participation has already surpassed $43 million through the first half of 2021, $18 million higher than at the same point in 2020.

From PitchBook estimates, the capital available from non-traditional investors has essentially doubled the amount normally available for venture capital deals, as the cash coming from these investors tops $250 billion worldwide.

This, too, is having a prolonged effect on how and when companies go public, often extending the length of time companies stay on the private markets and bringing up exit values in the process.

All of this, for better or worse, is changing the very face of VC, as late-stage capital becomes a necessary tool for exit activity. PitchBook suggests that it “may be time for a rebrand of these non-traditional investors,” as their presence within all stages of the venture lifecycle continues to grow.

The large checks that crossovers and other non-traditional firms are writing is also boosting the value of the companies. The median and average early-stage deal size through the end of June 2021 shot up to $9.5 million and $20.5 million, respectively, a big accrual from 2020’s aggregate of $6.4 million and $15.6 million.

“What we’re seeing is, because valuations are exploding, there’s more competition [at the late-stage] and firms are trying to get in earlier, leading to much more competition at all stages throughout the cycle,” says Sunita Patel, chief business development officer at Silicon Valley Bank.

Figures for the first half of 2021 focused mostly on the record number of mega-deals and the high concentration of activity happening at the latter end of the investment cycle. But even early-stage activity is beginning to set new records, as $19.6 billion of capital was invested across 1,303 deals in Q2, a quarterly record.

Sunita Patel

“VCs are really leaning in, in terms of value propositions that they offer companies, whether it be bringing clients into their portfolio companies, or bringing more into their ecosystem in the forms of partnerships”

Sunita Patel
Silicon Valley Bank


Larger deal sizes – at the early stage, no less – are also creeping up. The proportion of early-stage deals eclipsing the $10 million mark is approaching 50 percent of aggregate deal count, whereas deals over $10 million barely surpassed 25 percent of total deal count just five years prior.

The total effect non-traditional investors are having on the general VC market is undoubtedly significant, dramatically increasing the amount of capital available and raising prices in every round they touch. But more unfortunate for VCs, many public markets investors care far less about start-up valuations than their dedicated VC counterparts.

“Hedge fund appetite for VC deals has increased and some of those funds have reportedly offered to pay as much as 50 to 100 percent more than traditional investors,” Patel says.

“Compared with VC firms, hedge funds typically place less emphasis on the ownership on the capitalization table. They often don’t require a board seat, while VC firms typically do, which may be an attractive dynamic for some independent-minded founders.”

The value of value-add services

Despite Tiger investing in Blair, many seed and early-stage companies are not interested in having a large asset manager lead their deals. Many start-up founders are looking for something more. They want the value-add that many of the venture firms tout as their differentiation.

For instance, Tiger does not offer a go-to-market strategy guidance for young founders. Tiger and many other crossovers also take board seats, as they generally have a hands-off approach with their dealmaking. Tiger did not respond to VCJ’s request for comment.

Nonetheless, a lack of value-add services is causing a bit of a showdown as to which ownership structure best suits start-ups in these market conditions. And competing VCs are already eager to show how valuable they are as investors.

“Increased competition in the market leads to [VC] firms being more deliberate and intentional,” says Elizabeth Stewart, partner at Fenwick Brands, a consumer brands investor. “This conviction will increasingly play a key factor in how a brand, founder or company decides their capital partner-of-choice.”

In some ways, the increased competition and push to become more deliberate on the side of VCs at all stages is really about accessing these deals, where VC investors use their relationships and hedge funds use their cash by paying 2x or 3x multiples.

“Some of the early nuances in venture that really are not commoditizing are capacity in a company and the relationship networks,” says York of Top Tier. “Now I can tell you, lots of people like me have relationships, and lots of people like me have checkbooks, but still, I can only get so much access based on those things.”

How the rest of VC is responding

The idea of adding value to portfolio companies shot into the spotlight when Andreessen Horowitz came onto the scene in 2009, criticizing VCs for not adding value to their companies and making it clear that this was their intention.

It’s almost standard now for venture firms, even seed-stage investors, to offer value-add services. The kind of services can take many shapes, but some venture firms will operate platforms for their portfolio companies, helping with HR, accounting, recruiting, marketing, research, executive wellness and leadership.

Many in the industry now expect firms to ramp up their differentiation as they respond to the current moment.

“VCs are really leaning in, in terms of value propositions that they offer companies, whether it be bringing clients into their portfolio companies, or bringing more into their ecosystem in the forms of partnerships,” says Patel of Silicon Valley Bank.

For example, toward the end of 2020, Andreessen Horowitz launched The Talent x Opportunity (TxO) initiative, a donor advised fund managed by Tides Foundation to “help emerging cultural geniuses by providing them access to a new system of funding, training and mentorship that helps these entrepreneurs build durable companies around their cultural innovations.”

Additionally, many VC firms, especially in light of social justice movements such as MeToo in 2018 and Black Lives Matter in 2020, have worked to establish mentorship programs that help to level the playing field in favor of supporting women- and diverse-led start-ups.

These include Sequoia Capital’s Ascent program, 500 Startups, Black Founders, Pipeline Angels and Golden Seeds, among others.

In addition, some firms have launched similar programs, which generally focus on developing and recruiting talent, product marketing, design and other areas, York notes. “Now everybody’s doing it, and everybody has a little spin on their value-add,” he says. “The distribution of value-add is pretty similar.”

While hedge funds and other non-traditional investors may be having a moment in the ever-increasing dealflow of the VC industry of the current moment, the nature of these institutions doesn’t quite make room for long-term success managing a portfolio of young start-ups.

“They [the non-traditional investors] are not going to be on the bumpy ride when things turn,” York says.

Indeed, it’s clear that many firms are trying to compete based on their value-add services.
The question is whether entrepreneurs are more interested in partnering with a firm and using their value-add services, or will the cheap cost of capital and the plentiful amount available from large asset managers win out?

How the big get bigger

Private equity juggernauts add dedicated growth funds to their handy bag of tricks, writes Karishma Vanjani

Private equity superstars such as Blackstone, KKR and TPG have increasingly looked downstream to invest in late-stage growth companies. The rationale  simple: leverage the operational expertise, scale and resources of a large buyout to grow fresh innovative businesses and generate attractive investment returns.

The approach has led large shops to launch dedicated growth funds that have been putting millions to work. As a result, through Q2 of this year, 3,301 VC deals have received investment from nontraditional institutions (PE, hedge funds, mutual funds) worth about $116 billion in deal value, according to PitchBook data.The rise of growth funds within mega-firms has helped the biggest shops in the market to increase their size and the amount of assets they have under management.

Growth is another ancillary strategy, like secondaries, that large managers are adding on so that they can offer LPs the full range of investment opportunity.

Theory of evolution

PitchBook’s private equity analyst Rebecca Springer says growth funds are a natural byproduct of experimentation by private equity firms. “PE has become more competitive and continues to mature,” she says. “We are seeing firms become more creative with their strategy, whether it’s continuation funds, PIPE deals or now moving into venture.”

Beyond PE firms testing out strategies to achieve a range of outcomes, buyout firms are also seeing fewer opportunities of scale.

Further, for the biggest firms, it is not as though the mid-market is new ground – it is where they started investing.

“Even as we moved up market in terms of fund size, we didn’t want to leave the $75 million to $150 million equity check size [small and mid-size companies],” says Matt Hobart, co-managing partner of TPG Growth. Hobart joined the firm 17 years ago to launch the growth strategy.

“We have a fundamental view that growth [companies] will always be highly valued; people always pay for innovation,” he says. The firm draws the line between growth investment and traditional PE control acquisitions at $200 million.

LPs have also played a role in the rise of growth equity. “You have to realize that there is really a split among LPs,” says Kelly DePonte, managing director at placement firm Probitas Partners. “Many are focused on investing in the middle market and don’t want to invest in funds over $1.5 billion.”

While growth equity investments have been popular for some time, a lot of multi-strategy private equity firms have entered the space in the last five years, according to DePonte.

Touching the voids

For example, AEA Investors in May announced its expansion into growth equity with the appointments of two industry veterans.

Bobby Bassman and Ravi Sarin will lead a team of six that will pursue opportunities in tech-enabled, software and healthcare services companies.

Dealmaking in the growth space is largely focused on two robust pockets of the market: healthcare and technology.

In January, TPG Growth made a $125 million Series B investment in Prodigy Education, an interactive math learning platform. More recently, the firm led a $300 million Series C round into MX, a fintech innovator.

TPG’s bet saw participation from a slew of new and existing investors. These included venture firms such as Canapi Ventures, Point72 Ventures and Pelion Venture Partners; other PE firms such as CapitalG; a multi-stage investor called Cota Capital; and Regions Financial Corp, a bank holding company.

This is where the competition intensifies further. According to Jon Korngold, head of Blackstone’s growth equity business: “If you look at the lower end of growth equity, there’s venture capital, growth arms of firms, sovereign wealth funds, super angels, mutual funds, hedge funds – you have everybody there.”

Although growth is crowded, Blackstone – the largest private equity firm, with $619 billion in AUM – says that its scale and deep operational resources serve as the key differentiators.

Korngold says Blackstone Growth can provide large amounts of equity without the need to involve capital from another pool of funds, which suggests Blackstone can write minority checks as high as $700 million and not bump into its massive flagship fund.

As an example, Blackstone in June led an $800 million all-equity round into Amsterdam-based payments start-up Mollie, valuing the company at $6.5 billion. EQT Growth, General Atlantic, HMI Capital, Alkeon Capital and TCV joined the investment round.

Blackstone is relatively late to launching a growth fund compared with rivals TPG and KKR, which dedicated pools in 2007 and 2012, respectively.

Growth strategy

Blackstone has made roughly nine investments with an average check size of $200 million to $250 million. Korngold says the aim is to have a total of 15 fast-growing, tech-enabled companies in the portfolio, with Blackstone investment professionals generally not serving on more than three boards.

Despite growth being a minority investment, securing seats on company boards is a must for most large buyout firms if they are to play a more active role. “We’ll usually have multiple board seats – or at minimum a board and an observer seat,” TPG’s Hobart says.

A typical TPG growth fund aims to pack in 25 companies with the support of roughly 70 dedicated professionals globally: 40 to 50 in the investing team and 20 to 30 on the business development team.

The firm is raising its fifth growth fund. Although it declined to comment on the strategy for the vehicle, Hobart says that, more broadly, technology will always remain a key piece of the equation for TPG.

Among large buyout firms, Bain Capital is pursuing growth differently in that it does not have a dedicated growth fund. Investments are made from other vehicles, such as tech opportunities, credit, real estate and, particularly, the life sciences fund.

Much like TPG, Bain made a growth investment in an edtech company this year. The firm, through Bain Capital Double Impact – its impact investing strategy fund – invested in TeachTown, a provider of social-emotional software for students with special educational needs.