Lightspeed Founder and Partner Ravi Mhatre (Steve Jennings/Getty Images)

Weird Money

Swashbuckling venture capital is slowly becoming boring old private equity

Lightspeed may lead a wave of VC firms making PE-like investments as the amount of money they manage continues to increase.

Jack Raines

10/1/24 3:09PM

The venture capital business model has, historically, looked something like this: investors would identify promising startups, they would invest some amount of money in these startups, and a few of the startups would (hopefully) either get acquired or go public at a much higher valuation, generating outsized returns that more than paid back the entire value of the fund. Venture funds typically charge their limited partners (LPs) “2 and 20,” or a 2% management fee as well as 20% of the fund’s profits.

One constraint of this business model has been total market size: startups are relatively small companies (at least compared to their publicly traded peers) in which investors typically deploy relatively small amounts of capital (excluding, of course, outliers that can raise $6.5 billion or whatever), and only a minority of these startups will generate outsized positive returns. The result: effectively deploying capital becomes more difficult as a fund’s size grows. $100 million is easy to deploy across several early stage deals. $5 billion? That’s much tougher. With regards to compensation, venture funds face a tradeoff: more assets under management pays higher management fees, but it can create a drag on performance that reduces profit potential.

Another issue facing venture capital lately has been fewer exit opportunities. Companies are increasingly choosing to stay private longer, IPO activity since 2022 has been sluggish at best, and regulators have shown increased scrutiny toward mergers and acquisitions. The result: global VC exits by both volume and total market value hit five-year lows in 2023, impacting venture returns.

But what if there were a solution that could solve venture capital’s size constraints and liquidity problems? It turns out, there is, and it’s called “private equity.”

Unlike venture funds, which write small checks to small companies, PE funds typically take much larger controlling stakes in mature companies, where they look to improve operating leverage before either selling them (often to other private equity firms) or taking them public. If a venture fund were to, say, make private equity-like investments, it could presumably deploy a lot more capital, allowing the fund to charge a lot more in management fees, and the company would have a new pool for potential buyers of its portfolio companies as well: other PE funds.

Lightspeed Venture Partners, a Menlo Park-based venture firm with $25 billion in AUM, appears to be doing just that. The venture firm is looking to raise $7 billion across three new funds, and ~40% of that funding is going to investments that look a lot like private equity. From The Information:

Close to 40% of the new money will go to an opportunity fund that will make follow-on investments in its portfolio companies and buy shares in late-stage startups such as Stripe and Rippling from existing investors. In some cases, Lightspeed will seek controlling stakes in aging enterprise software startups and try to prepare the companies for a sale or public listing.

Assuming a 2 and 20 structure, a $7 billion fundraise represents $140 million in annual management fees — not a bad payday. Additionally, its investment strategy aligns well with current market conditions. Lightspeed’s line of thinking probably goes something like this:

“There are several late-stage private companies with investors that want to offload stakes on the secondary market. Why not raise a fund to buy some of those stakes, potentially at a discount, if those funds need to return capital to their LPs? And while we’re at it, we might as well go full-buyout mode and acquire controlling stakes in some mature companies, too.”

While 60% of Lightspeed Venture Partners’ new capital will go toward funding investments in growth-stage and early-stage startups, this ~40% is “venture” capital in name only, not that that’s a bad thing. At the end of the day, investment groups are in the business of making money, and if private equity practices present a more lucrative investment opportunity than traditional venture, I believe we’ll see other large venture funds building out private equity-like vehicles, too.

Max Knoblauch4h

Nintendo climbs for third day as China ramps up its memory production

Nintendo shares are climbing on Tuesday, marking the company’s third straight session of gains — something it hasn’t done since early March. The Mario maker’s US-listed ADRs were up about 4% in Tuesday morning trading.

The return of the Switch 2 game bundle appears to have stoked investor optimism in the company’s console sales, while China’s accelerating memory production plans could alleviate some of Nintendo’s pain from the “RAMpocalypse.” For the better part of a year, memory prices have surged as AI demand hoovers up compute power. That’s squeezed video game console makers — and the broader consumer electronics industry.

Tracking the performance of Nintendo ADRs against memory giant Micron helps put this move in perspective. Nintendo is a big memory consumer, and not in the front of the line in terms of securing supply. Micron, obviously, benefits from its offerings being in high demand.

Tuesday’s price action is just a drop in the bucket, and comes as part of a recent stretch where the stock market’s high-flyers are having their wings clipped while beaten-up laggards rally.

In its first-quarter results on Monday, Chinese DRAM producer CXMT said it’s ramping up production and issued bullish guidance. The company is planning an IPO later this year, and it could be China’s biggest of the year.

For Nintendo, more global memory production could see rising costs start to deflate, improving margins in a vital year for its new console.

Jon Keegan5h

Snowflake shares rise after BofA raises price target, predicts strong earnings next week

Snowflake shares jumped after Bank of America Securities analysts raised their price target for the cloud data warehousing company to $205 from $195, with a “buy” rating.

BofA analysts wrote that Snowflake will have a strong quarter because “the robust demand it was seeing heading into this year should continue unabated.” The report called the stock a “a share gainer in the attractive and growing AI business intelligence opportunity.”

Snowflake shares are down about 20% year to date. In November, shares hit a 52-week high of $280.67.

Helena Cheng6h

Standard Chartered to replace “lower-value human capital,” cutting jobs “in favor of the machines”

Standard Chartered is announcing a major “it’s not you, it’s me” corporate makeover with a 15% cut of its administrative roles (roughly 8,000 jobs) by 2030 in favor of automated systems.

“It is not cost-cutting, but it is replacing, in some cases, lower-value human capital with the financial capital and the investment capital that we are putting in,” said CEO Bill Winters.

Congratulations to Standard Chartered employees who survive this culling; obviously, your CEO thinks you’re at least medium-value human capital.

Defending the strategy at a press briefing in Hong Kong, Winters explicitly rejected framing the large layoffs as a standard budget-slashing initiative.

He noted that the bank does not view the transition as an unmitigated loss of staff, but rather “job role reductions in favor of the machines,” which will “accelerate as we go full-bore into AI.”

The operational downsizing aims to boost profitability and increase overall income per employee by 20% over the next two years.

The bank joins a long list of companies that have announced job cuts in concert with plans to lean more into AI. Per CNBC, the subsequent performance of these stocks varies significantly, with some up more than 40% and others down just as much, or worse.

Luke Kawa6h

Hyperliquid Strategies spikes on report that the SEC will soon greenlight an “innovation exemption” for tokenized stocks

Shares of Hyperliquid Strategies are soaring in early trading after Bloomberg reported that the Securities and Exchange Commission is slated to release an “innovation exemption” that formalizes rules around the trading of tokenized stocks.

In what Bloomberg dubbed a “surprise move,” the SEC is slated to permit tokenized stocks (crypto wrappers for traditional shares) even if the public companies don’t consent to their creation.

Hyperliquid Strategies is a digital asset treasury company that holds hype tokens and provides liquidity on the DeFi exchange Hyperliquid.

Tokenized securities offer faster settlement and expanded trading hours, though without the same market depth that typically prevails with traditional exchanges and with a higher potential for price fragmentation.

Per the report, which cites people familiar with the matter, these platforms would need to provide their third-party holders with voting rights and dividends in order to list these tokens. As such, the platforms would effectively be required to hold the underlying securities they’d be offering tokenized access to.

Helena Cheng7h

Home Depot reports Q1 sales beat, reaffirms full-year guidance

Home Depot reversed its initial gains following earnings after a spike in long-term bond yields overshadowed the retailer's solid Q1 results.

Key numbers:

Revenue of $41.77 billion (estimate: $41.50 billion).
Adjusted earnings per share of $3.43 (estimate: $3.42).
Comparable-store sales of 0.6% (estimate: 0.9%).

Comparable sales came in below forecasts, while the company reaffirmed its full-year guidance, expecting annual sales to grow between 2.5% and 4.5%.

“Our first quarter results were in line with our expectations,” said Ted Decker, chair, president, and CEO. “The underlying demand in our business was relatively similar to what we saw throughout fiscal 2025, despite greater consumer uncertainty and housing affordability pressure.”

While the company has served neighborhood handymen for decades, its recent growth is also partially charged by its finalized acquisition of Mingledorff’s, a premier wholesale HVAC distributor operating 42 commercial locations across the southeastern United States. Home Depot said the transaction gave it access to high-volume commercial mechanics and residential trade contractors, expanding its total addressable market to $1.2 trillion.

The company is also using machine learning to automate parts of commercial building work that have traditionally been manual. One example is its Material List Builder AI, which lets contractors upload architectural blueprints or dictate voice notes from a jobsite to generate materials lists.

Investors are continuing to track whether strategic pricing changes and distribution scale can help the business maintain its full-year gross margin target of 33.1%.