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Venture capital firms have recently been experiencing windfall gains at a record pace. While the venture capital industry is defined by a few big wins offsetting a portfolio of huge losses, the number of investments resulting in multi-billion profits has soared recently. Many firms are on track to have their best returns since the dot-com boom in the late 1990s.

These gains are being fueled by investments in fast-growing tech companies, especially those with recent initial public offerings (IPOs). Macroeconomic factors, such as low interest rates, federal stimulus packages, and a flood of retail investors participating in the stock market, are adding further momentum.

Top Venture Capital Firms

Palo Alto-based fund Sutter Hill reaped a $12 billion profit on the $192 million investment it made nearly a decade ago in Snowflake Inc., a cloud-computing data warehousing company. Snowflake went public in September 2020. Its blockbuster IPO set the record as the largest software company IPO in history at the time. At the end of Snowflake’s first trading day, the company reached a valuation of over $70 billion, more than five times its $12.4 billion valuation in February 2020.

Sequoia Capital, a Silicon Valley venture capital firm that has backed companies that now collectively control $1.4 trillion of stock market value, has scored many big winners in its portfolio. Sequoia Capital provided early financing to Apple and Alphabet Inc.’s Google. It also made an early $235 million investment in Airbnb that today is worth more than $14 billion. The venture capital fund experienced a similar windfall with its investment in DoorDash. It invested $240 million just a few years ago. With an IPO in December 2020 and a current valuation around $40 billion, DoorDash’s investors have seen their investments rise. Today, Sequoia’s stock in DoorDash is valued at $8.4 billion.

Accel, formerly known as Accel Partners, has funded technology companies such as Slack, Facebook, Spotify, and Qualtrics. Recently, Accel has seen eye-popping gains from its $172 million investment in UiPath. The software company went public in April 2021, becoming one of the top performing U.S. software IPOs. Accel holds more than $7.5 billion of stock in UiPath.

Lock-Up Periods Following IPOs

After a company goes public, venture capital firms typically are subject to a lock-up period on the shares held. This lock-up period usually lasts for 180 days following the IPO. Once the lock-up period expires, some venture capital funds decide to sell all or a large portion of their shares immediately. Others opt to hold a bit longer, hopeful that the stock price will rise significantly more.

Reminiscent of the Dot.Com Bubble

Some see features of the dot-com bubble of the late 1990s. Valuations have soared much more dramatically than the company’s underlying fundamentals. Looking at metrics such as companies’ revenues, and comparing it to overall valuations reveals some interesting trends. The media tech IPO price-to sales ratio—a measure of a company’s total market capitalization divided by the past year’s revenue—is currently around 20 this year. In 2020, the ratio was 23. In contrast, between 2002 and 2019, the ratio stayed below 12 during each calendar year.

The pace of record-breaking IPOs has continued its momentum from the second half of 2020 into 2021. The number of IPOs exceeding a $5 billion valuation after the first day of trading is currently 21 for 2021 so far.

International Venture Capital

On the international front, Japan’s SoftBank has had some notable winning tech investments as well as underperformers. SoftBank’s Vision Fund, its technology-focused venture capital arm, has had success with its investment in Coupang Inc. Coupang, a South Korean e-commerce site, raised $4.6 billion in a March 2021 IPO. The company has an estimated market value of $60 billion. SoftBank holds a 37% stake in Coupang, which it paid nearly $3 billion for. Coupang’s recent IPO success has resulted in a roughly $33 billion profit for SoftBank, assuming current stock prices hold.

SoftBank has also has experienced some disappointments, such as with the more than $13.5 billion it has poured into WeWork. Once valued at $47 billion, WeWork has since seen its value plummet since its botched IPO. SoftBank founder and CEO Masayoshi Son has since characterized the Vision Fund’s investment in WeWork as “foolish.”

Garry Tan, a partner at Initialized Capital, believes the trend of blockbuster gains for the venture capital industry will continue to hold. Tan states, “I think we’re going to continue to see more unusually highly valued exits.” Tan invested $1.3 million in Coinbase early on. As a result of Coinbase’s successful public debut, that investment is today worth more than $530 million.

Takeaway

While the venture capital industry is marked by scoring a few megahits across a portfolio, those gains have been especially steep for the top 5% of funds. According to data from 2010 to 2015, the median venture capital fund had an average annual return of 16%. In contrast, the top 5% of funds had average returns of 42%. This trend has held steady, and the largest funds continue to have some of the most eye-popping gains.