#54: Long Weekend Retro: The When and How of VC Timing
02.20.2023
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Long Weekend Retro: The When and How of VC Timing
The past decade is arguably the golden time of Venture Capital money. With a concentrated amount of VC IPO and liquidity events in 2018-2020, some funds saw over $1B exit liquidity return and return alone on investments. 2022 has taken a sharp term on all of us - founders and investors alike are learning and adjusting to the phases of “flat rounds, down rounds, structured rounds, extensions…” etc. At the time of seeming darkness, we thought it may be interesting to look back and see how the journey panned out for some of the largest VC outcomes and examine whether these generational companies’ paths have been “straight up to the right.” We thought of this week’s writing without knowing what we would find out - it could be encouraging or discouraging, but let’s be intellectually honest and dive in together.
Airbnb: Market Cap: $86B, Founded in 2008
For those who are familiar with Airbnb’s journey, it wouldn't be a surprise that the company didn’t start off with the strongest foothold. The company was founded during the ‘08-10 economic crisis and the co-founders were, at one point, selling cereal boxes to fund the business (Chk Out Obama O’s).
But with the formal Series A funding, the company really started to take off - Series B came off less than 12 months from A and brought the company to a Unicorn Status at $1B Post- in 2011. Ever since then, the company has raised at a rough interval of every 12 months, with valuation climbing 30x within five years. However, the company saw the biggest revenue, Growth, and valuation hit in 2020 when COVID heavily impacted the Travel & Leisure industry. Silverlake, along with other growth funds, injected $1B+ fresh capital to bring the company’s total BS position to over $4B. Valuation, at this point, took a steep downturn as the company lowered internal valuation to $26B earlier in the year. Then the Silverlake round reportedly brought it further down to $18B (source). However, we’d call out that because of the structured round nature of this growth capital, it’s unsure whether the effective post-money dropped that hard to $18B.
Soon after the last round of growth capital injection, the company went public in Dec-2020 (early 2021) with an IPO valuation of $41B. 2021 Also saw the company rebound to $6B in revenue, with Valuation multiple (est.) coming down to ~7x on top-line. Today, Airbnb 2x its IPO valuation and sits at a massive ~$85B market cap.
Snowflake: Market Cap $50B, Founded in 2012
Different than the Airbnb Story, Snowflake felt much more like a “Straight up to the Right” playbook. The company has always had a strong fundraising history, with fresh VC backing rounds every year since its foundation. The company also NEVER had a down round - valuation accelerated once the company crossed the $1B post-money hallmark. From 2018-2020, the revenue more than 20x’d (based on guesstimates and rationale listed in the note section ) and the valuation followed accordingly. At the scale SNOW possessed ($100M ARR+), this type of growth is phenomenal and unprecedented.
Different than Airbnb’s multiples that went down over time with the company’s scale, SNOW’s revenue multiple held up or even slightly bent upward towards the IPO. A lot of this is potentially correlated with the broader macro background in 2020-2022 of VC/Growth capital boom. That being said, the company’s speed of adoption and top-line scale warranted a very strong success story for VC return outcome and company growth alike. This is, as far as I have observed, one of the best success stories in VC-backed companies - clean, robust speed of adoption, growth at scale.
Shopify: Marketcap $55B, founded in 2006
Shopify’s story, completely different than Snow, was full of twists and turns (full story here). The company started as a Snowboard gears website. The founders started Shopify as a set of merchant tools in 2006. Running the business straight into the ‘08-’10 economic crisis, Shopify pretty much ran bootstrapped till 2010. The long empty period on the left side of the appendix above shows that Shopify was modifying its idea many, many years before even taking any outside money.
Growth was slow at first - the company made just north of $8k a month in 2007 off a very small customer base of some of its former Snowboarding community. Later that year, the company made a major strategic decision to change pricing from take-rate based to subscription-based with a small tx fee tacked on that decreased as plan size increased. While still predominately used by SMBs, Shopify also started attracting larger customers in 2008.
The founders took the first VC check in 2010 with a Series A round led by Bessemer, FirstMark, and Felicis. Since then, the company did 2 more rounds on a 3 years time-span and quickly went IPO right after that. The business IPO’d at a $1.3B valuation - or about 39x fold Market Cap growth since then in the Public Market. To IPO and become a public company this early is no longer common, but at that time, consideration set and option sets were arguably different as well. The company went public at just north of $200M revenue and is projected to reach $6.7B revenue in 2023.
Takeaways & Implication for this Cycle: As an investor, I have always considered myself a student of all operators & founders in the different industries and also a student of the cycles/pattern recognitions of the past. These observations are definitely oversimplifying the impressive stories of generational companies. Still, we hope these “pattern recognitions” can give founders, operators, and investors alike some inspiration during the days when things don't seem to trend “up to the right.” Here are some of my learnings:
Every Companies’ Growth Trajectory is Different, and that Is Normal & Healthy: Airbnb serves direct to consumers, Snowflake serves to Enterprise, Shopify serves SMB; Airbnb had a rough start, selling cereal boxes, Snowflake took some time to get to monetization, but inflected soon after, whileas Shopify pivoted its idea multiple times. There is no “one size fits all” playbook - and that’s what makes venture investing & startups so fascinating.
Tough Time Feels Longer than It Seems: Looking from a longer time horizon, the growth trajectory for these companies has been upward and rightward. But zooming in, those growth curves comes with twists and turn, which take a lot of long-term oriented strategic decisions and painstaking executions to direct the team in the right direction. Shopify had to let go of the original to-c snowboard shop idea and completely redo the pricing model to find GTM fit eventually. Airbnb had to let-go many employees and re-designed its cost structure to survive the pandemic. As people say, progression is never linear - Some companies may find the right product-need fit in a short amount of iteration time, but others may take longer, and that’s okay as well.
It’s Important to Maintain a Healthy Rhythm of Feedback Collection: For VC funding, all three companies mostly saw about 12-24 months time intervals from one round to another. Whether pre-empted or led by the founder’s initiatives, these companies had a somewhat healthy pace for conversations & interactions with the capital market. On the one side, these market reactions oftentimes keep founders honest with realistic feedback. On the other side, it marked good milestones and likely led to stronger talent attractions. Don’t get us wrong - there are plenty of companies that bootstrapped all the way to IPO. But it’s always healthy for the company to have an ongoing dialogue with the overall market, just like with its own customers.
Chart of the Week in the Public Market:
Friday’s market movement put a pause on the bull run that has been going on for weeks. We believe the market is transitioning from “inflation trade” to “recession trade”. We anticipate more downward correction as the market starts to price in the possibility of a 50bps hike in March or the long rates hike.
Fintech index dipped form 9.2x to 8.1x, seeing the most drastic pullback among the three sectors we track. The space remains volatile and likely will continue to ebb and flows with the “recession trade” narrative as macro has so much more impact with fintech businesses - lending, savings, etc.
Consumer held up the strongest out of all the three sectors and actually climbed up from last week’s 2.9x to 3.2x. Gaming continued to lead the pack while Subscriptions also saw an uptick.
(Market data as of 2/17/2023, source: Bloomberg, CapIQ. See index composition at the bottom)
Chart of the Week in Private Market
(Deal data as of 2/20/2022, source: Pitchbook. Defined as - Series B+ global growth stage deals)
Private market remains tepid, with just about $6B growth dollar deployed in a trailing 1 month. Our guess is that this primary fundraising announcement index will continue to trail the actual market movement, with more secondaries and structured equity rounds being constructed in 1H23.
Sources: Software Index: over 200+ public companies / Fintech Index: V, MA, PYPL, SQ, BILL, ADYEN, SHOP, LSPD / Consumer Index: ABNB, BMBL, CHWY, CVNA, DASH, DHER, DKNG, DUOL, ETSY, FB, FTCH, GDRX, GOOGL, MTCH, NFLX, OPEN, PINS, POSH, PTON, ROKU, SFIX, SNAP, SPOT, UBER, W. Please feel free to ping us for further detailed breakdown