Venture-capital firms buy public technology stocks as startup market stocks

Other firms — including Sequoia Capital and Andreessen Horowitz, two Silicon Valley investors — are buying stakes in public tech companies that haven’t previously been backed as startups.

Venture capitalists say they are taking advantage of the stock sale, which has allowed them to buy shares in high-tech companies at bargain prices for the first time in years. At the same time, they say they have struggled to find good investments in the startup market, where new financing is expensive and startup rounds have slowed despite record capital.

In some cases, Silicon Valley venture firms have been restructured to allow for expanded investment scope. Sequoia and Andreessen have been registered as investment advisors for the past three years, a move that allows them to hold more assets such as cryptocurrencies and public stocks. Their behavior in some ways mirrors that of hedge funds, which expanded their investment mission during the recent tech bull market when huge amounts of cash poured into startups.

“There’s a blurring of lines” between private and public investment, which helps companies raise new money, said Byron Daly, a partner at the law firm Fenwick & West LLP. “There’s a lot of interest in where companies can go beyond traditional capitalism.”

In the first quarter, Sequoia’s US startup fund bought more than 2.5 million new shares in data-analytics company Amplitude. Inc.

and 573,500 new shares in food delivery service DoorDash Inc.,

The two companies listed Sequoia as their largest shareholder at the time of their initial public offering, according to public filings. By the time Sequoia bought the shares, both companies’ stock prices had fallen more than 60 percent from last year’s all-time highs.

In the third quarter, Sequoia’s startup funds bought public shares of new companies it had not previously backed, according to a person familiar with the matter, the first time it has done so since 2017. Sequoia has not publicly disclosed those purchases.

Pat Grady, a partner at Sequoia, said the firm began compiling lists of public companies to invest in late last year when the market began to decline. In the year After the 2008 crash, Sequoia did a similar exercise when it released a list of 20 public companies. He ended up buying two shares: in the software companies Autodesk Inc.

and Cadence Design Systems Inc.

Mr. Grady ultimately regretted that the firm did not make more public market bets because of the financial crisis.

Mr. Grady said the company’s growth investors — which specialize in backing startups close to public listings — now spend about 25% seeking public investments.

Historically, venture funds including Sequoia were required to return shares to investors after seven to 10 years, a restriction that often forced them to release shares in their legacy companies after public listings. After registering as an investment advisor last year, Sequoia can now retain them indefinitely.

Investing in the public stock market exposes venture capital firms to price fluctuations that are rare in the private market. Timing the sale of public shares can be more difficult than selling shares after a public listing, which often guarantees that corporate companies will make a profit based on how cheaply they acquired the stock.

Purchases of some public shares by venture firms have already increased earlier this year, indicating risks. Sequoia Dordash Investments has lost more than 40% in value since March, even as the food supplier’s second-quarter revenue growth beat analysts’ estimates.

Such volatility has made some fund investors skeptical of the strategy. Investors, including pension funds and endowments, turn to venture capital funds because they particularly want exposure to hard-to-find startups, not public stocks they can buy on their own.

“Most private market investors are not happy when their private market firms buy public market securities,” said David York, managing director of TopTier Capital Partners, which backs the venture fund. “We’re not asking them to act like investors, and we’re not paying them.”

Historically, venture capitalists have distinguished themselves by being the first to identify the next Uber technology. Inc.

Or Facebook and startups risk billions of dollars in losses if they make the wrong decision or lose a competitive deal. Some venture capital firms are buying public shares of companies they think will return as startups.

Andreessen Horowitz bought 1 million new shares in financial services firm Block in the first quarter. Inc.

According to a public statement from a $5 billion growth fund that aims to support large startups. Founder Marc Andreessen says not backing Block, formerly known as Square, as a private company is one of his regrets as an investor. The news site The Information previously reported that the firm had bought Block’s shares.

Andreessen bought more than 1.4 million DoorDash shares from the same fund, according to the filing. The firm owned a small stake in DoorDash when it went public in December 2020 and missed out on being the largest shareholder in the food delivery company’s IPO, which was acquired by Blockbuster.

The investments could help them find opportunities to invest in startups, despite the slowdown in the private equity market. U.S.-based VC firms will raise $151 billion in new funds by 2022, according to data released Thursday by Pitchbook Data Inc.

The trend may outpace bargain-hunting. Andreessen Horowitz recently plans to launch a new fund dedicated to public investments and has interviewed candidates to run the fund, people familiar with the effort said.

Mr. Grady said Sequoia would be open to hiring public investment professionals in the future, though he had no immediate plans to do so.

Vince Hanks, a partner at New York venture capital firm Thrive Capital, said his team has been admiring the business behind Carvana. Co.

In the year A used car retailer that didn’t back Thrive before going public in 2017. When Carvana’s stock began tumbling last fall, the company gained attention.

Thrive ended up buying 812,713 shares in Carvana in the first quarter and nearly doubled its stake in the months since.

“We think it’s very similar to how we would invest in a private company,” said Mr. Hanks, whose Thrive aims to hold public shares for years.

— Tom McGinty contributed to this article.

Write Berber Jin at berber.jin@wsj.com