Five months after raising a $225 million funding round, robotic process automation startup UiPath announced another $568 million cash infusion that was led by hedge fund Coatue, with asset managers Wellington and T. Rowe Price also taking part.
Hedge funds and asset managers aren’t considered venture capitalists, angels or accelerators in a traditional sense. But UiPath is far from the only private tech company to attract these “tourist investors” so far this year— rounds with at least one tourist made up more than 70 percent of total 2019 deal value to date.
Getting in on pre-IPO funding rounds can help investors profit off relatively low valuations and avoid heavy losses if a market debut flops. There are some dangers that come as tourist investors pile in and big tech companies stay private longer, though, including pushback from later investors when it comes to pricing the IPO, and the possibility of getting burned if private valuations turn out to be too rich.
Marie Myers, chief financial officer at UiPath, told Business Insider that the company’s management team was looking for investors who would give coaching and feedback as UiPath thought about life as a public company.
“We’re at a critical stage of our journey,” Myers said. “We’ve had several rounds of financing at this point of time and we’re in a very high-growth stage. We’re looking for folks that would stay with us for the entire journey and were willing to commit to the long haul.”
Myers, who was just weeks into her tenure at UiPath when fundraising started, said she was caught off guard by how much interest there was from investors who wanted a stake in the company.
“There was just seriously overwhelming interest in this round,” Myers said. “People found all different ways to reach us.”
UiPath’s April funding round was one of 322 late-stage US tech deals that involved tourist investors so far in 2019, according to PitchBook data, and the volume of late-stage tech deals that involve at least one tourist has skyrocketed.
Tourist investors participated in 421 late-stage rounds in 2008, for a total deal value of $7.9 billion, according to PitchBook. By 2018, they were part of 606 funding rounds, and total deal value shot up to $42.1 billion.
“The companies that have proven their success and are growing quickly are very attractive to those investors,” said Cameron Stanfill, an analyst with PitchBook. “Those are some of the companies where you see the valuations growing the quickest … Investors are able to get a return boost by being in slightly earlier than the IPO.”
The most active tourist investors include debt financers like Western Technology Investment and banks like Goldman Sachs, as well as the hedge funds and mutual funds that traditionally buy giant stakes when a company eventually goes public. Tiger Global Management and T. Rowe Price, for example, each made more than 90 investments since 2008. Fidelity has made 75 investments during that time period and Wellington Management made 59.
Pre-IPO investing has also helped some investors avoid getting burned by post-debut tumbles. Lyft shares sank nearly 47% in the weeks following its $2.34 billion March IPO, but Fidelity’s $808 million investment remained in the green.
The asset manager bought the majority of its shares during private funding rounds in the year before Lyft went public. So even though most other institutional investors bought their stakes at Lyft’s $72 IPO price, Fidelity paid just a fraction of that a few months earlier.
Fidelity’s investment worked exactly as planned — the firm turned a profit on an IPO where most of the money was made by the venture capitalists who kept things afloat during Lyft’s 10 years as a private company.
So far in 2019, there were 994 late-stage funding rounds for US tech companies, with a total of $37.9 billion raised. Tourist investors participated in one third of those rounds, but rounds with at least one tourist investor made up 72% of the total value. Similarly, in 2018, rounds with some participation from tourists made up 35% of the deals and 72% of the deal value.
This recent spike builds on a trend that emerged earlier in the decade. Coatue and T. Rowe Price both invested in Facebook before it went public in 2012, and unicorn startups like Lime, DoorDash, Instacart, WeWork, and Nextdoor all have taken money from these investors or their competitors.
But there’s a costly downside
Taking money from hedge funds and asset managers in private rounds may mean more friendly faces when management finally hits the road to pitch its IPO, but this can also lead to trouble in the process.
Uber CEO Dara Khosrowshahi was incentivize by a $100 million-plus bonus to get the company to a $120 billion valuation when it went public in May.
When the IPO finally came around, though, some of the largest Uber shareholders pushed back against buying more of the company’s stock at such a premium to what they had paid in earlier rounds, the New York Times reported in May. Uber’s market cap is currently around $75 billion.
In other cases, asset managers have been burned by startups that were more hype than hustle.
When data visualization company Domo when public in June 2018, it priced its IPO at $21 per share. It was a down round for the company, which was once valued over $2 billion, and ultimately went public with just a $600 million valuation.
For investors who bought on IPO day, it may seem like a discount. But not everyone was so lucky.
In the years leading up to Domo’s IPO, BlackRock bought $434 million in Domo shares for $126.47 a pop — six times what the stock was worth when it finally went public.