Why VC Investments are Not About Startups Anymore

If you’ve watched "Pirates of Silicon Valley'' or “The Social Network,” you might remember a common message: any innovation or big company starts small. A deeper analysis of the movies reveals the distorted image of an innovative company among investors.

There is a general belief that new tech companies are financed by exceptional enthusiastic capitalists, that the survival rate of startups is extremely low, and squeezing profits from them is akin to a miracle. This is why many opt to invest in popular public companies. 

However, innovative companies are no longer seen as unreliable "startups" that huddle in a garage. Today, they are billion-dollar enterprises.

Why Do Companies Go Public Less Often?

Traditionally, the primary reason for companies to go public was the lack of funds for development. Netflix, Alphabet (formerly Google) and Amazon went public just a few years after their launch — the VC market was quite narrow, and IPO was the only solution to go. 

Today, there is much more capital in the VC market, and it is easier for private companies to raise funds to support their development and R&D goals. To gauge how much the private equity market has grown, just look at the total volume of deals with their shares (the so-called secondary market). According to Pitchbook, this indicator soared to $74 billion in 2018, from a little over $2 billion in 2001.

Private companies get funding from investment rounds almost equivalent to IPO. According to analysts at Pitchbook, in 2016 the number of mega-rounds that raised more than $100 million exceeded the number of IPOs, and this gap continues to grow.

Companies are still going public, as seen by the increase in public offerings over the last couple of years. But for a company with a high valuation and a viable product it is easier to attract investors – the better the company's financials, the more funding it can raise. That is why fewer startups and more unicorns —private companies valued at $1 billion or more— are going public. According to the Financial Times, the average timeframe of a company from foundation to IPO has increased from 5 years in 2011 to 11 years by 2020.

The New Face of Private Companies

Today companies stay private longer and go public when they have quite a mature and ambitious business. Some potential IPOs enjoy particular attention from investors. Let's look at the examples of "startups" that plan to go public.

Stripe

A fintech company that provides financial services and online payment processing. In April 2021, it raised $600 million in its eighth funding round, at a valuation of $95 billion, close to such publicly traded giants as Booking.com and British American Tobacco.

Klarna

A major fintech company from Sweden best known for Buy Now Pay Later, a deferred payment system that has become an online retail standard. In the summer of 2021, the company raised about $640 million in a round of funding that valued it at $45.6 billion. This compares to the value of Xiaomi or Cloudflare.

Databricks  

A major big data developer focused on one of today’s biggest IT fields. Databricks streamlines database management with artificial intelligence (AI) and visualization tools. There is huge demand for such services: the company has over 5,000 corporate clients in more than 20 countries. In August 2021, Databricks raised $1.6 billion in a "round of the year," at a valuation of $38 billion.

The above companies are just the tip of the private equity market iceberg. There are hundreds of unicorns with established businesses, resources and a clear development strategy. Unlike public companies, they still have great growth potential, and it is possible to grab their shares on the VC market – the question is how.

VC Investments in Your Phone

The VC market is experiencing a structural makeover today, with the share of alternative funds expanding. These funds target accredited investors rather than major capitalists. Any private investor with an annual income of at least $200,000 can claim the accredited investor status. A family with an annual income of at least $300,000 or a person with $1million in savings also qualifies for the status.

In 2019, more than 16 million households in the United States met these criteria according to the SEC. This suggests that many members of the middle class already can invest in private companies and it is up to services that can provide easy access to such investments.

Dizraptor app, one of the first services for investing in private companies is already on the App Store and Google Play. It lets you invest in fairly large private companies providing new technologies across industries such as space, online learning, foodtech, fintech, biotech, AI. Graphcore, a developer of ultra-fast AI chips, and Calm, a meditation app used by millions of people globally, are among the recent offerings. Bowery Farming vertical farms, StoreDot extreme fast-charging batteries, and Elon Musk's Neuralink brain chips are on the app’s list for the near future. 

When investing in a private company via Dizraptor, investor becomes a shareholder in a fund (SPV), which in turn owns the shares in the company. Such a fund is registered in the USA for each investment opportunity. This is how private investors can legally overcome the high entry thresholds of the VC market. 

Private companies are a big investment trend for the next few years. Although ordinary investors have not yet reached this market en masse, Robinhood’s example shows that mobile applications with easy access to shares can bring millions of investors to the market.