I'm curious if there is any analysis anywhere about the potential returns from buying into the portfolio companies of the top VC firms (benchmark, a16z, sequoia etc) when they go public?It's well known there's a power law in VC, but does that breakdown after IPO? If not, seems like would be a good strategy.
Interested to hear your thoughts! thanks
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Based on the most helpful WSO content, the performance of public companies that were previously backed by top-tier VC firms like Sequoia, Benchmark, and a16z can vary significantly. While these firms are known for their ability to identify and back outlier companies that generate outsized returns, the dynamics often shift post-IPO.
Here are some key considerations:
Power Law Dynamics Post-IPO: The power law that dominates venture capital returns (where a small number of investments drive the majority of returns) may not necessarily hold after IPO. Once a company goes public, its performance is influenced by broader market conditions, public investor sentiment, and operational execution, which can dilute the "power law" effect seen in private markets.
Valuation Challenges: Many VC-backed companies go public at high valuations, often reflecting significant growth expectations. If these expectations are not met, the stock can underperform, as seen with some high-profile IPOs like Uber and WeWork.
Top-Tier VC Advantage: Companies backed by top-tier VCs often have better access to resources, networks, and talent, which can position them for success post-IPO. However, this is not a guarantee of strong public market performance.
Market Timing and Sector Trends: The success of investing in public VC-backed companies also depends on market timing and the sector's overall health. For example, tech companies may perform differently depending on the macroeconomic environment and investor appetite for growth stocks.
While investing in public VC-backed companies could be a viable strategy, it requires careful analysis of individual companies, their valuations, and market conditions. The historical success of a VC firm does not always translate into consistent public market outperformance for its portfolio companies.
Sources: Venture Capital Salary versus BB and Private Equity, Q&A: Principal at Early-Stage VC Fund, https://www.wallstreetoasis.com/forum/venture-capital/vc-is-a-laughable-shitshow-change-my-mind?customgpt=1, VC startup idea - PE or VC interest? Are these numbers viable?, Which investing strategy will be most challenged this decade (‘20 through ‘29)?
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