SurveyMonkey deal demonstrates power of late stage private markets

News Report: SurveyMonkey Valued at US$2 billion as Some Investors Sell Shares

Once upon a time, the only way a tech company could raise $250 million was via an Initial Public Offering. Then along came Facebook, and the mold was broken. Over the course of a few years, Facebook did a series of financing transactions, both direct and via secondary platforms such as SecondMarket. Several institutions and Family Offices bought shares privately, and made out handsomely once the IPO froth had settled. Twitter followed in the same path, and large “late stage” fundings are now commonplace for the high quality pre-IPO cohort — whether they be debt or equity or a combination of each.

From the company standpoint, these brokered stock deals served a purpose. Early (primarily former) employees and Series A venture capital funds got the chance to take some money off the table. And, if the need was there, CFOs had a third party valuation should they want to tap into this demand to raise some private capital for the company’s own balance sheet, too. Underwriters benefitted as well, as these “fur coat” transactions removed some of the pressure to include a large secondary component in any eventual IPO. Retail investors would also benefit by the reduced overhang on the stock following the IPO.

The success of these large private offerings, often without any of the hooks that usually come with traditional VC rounds (such as Board rights or vetoes on material events), served every master. Although each generation of VCs has but one or two Facebooks, the success of these pre-IPO transactions appears to have opened the window for far smaller names with substantially less buzz.

The most recent examples of large private rounds are Survey Monkey and Vancouver’s BuildDirect. This from The Wall Street Journal:

A group of large money-management firms are valuing SurveyMonkey at close to $2 billion in a new round of funding that will help fuel the online questionnaire service’s expansion into corporate software, said a person familiar with the matter.

The Palo Alto, Calif., startup raised $250 million from new investors including T. Rowe Price , Morgan Stanley Investment Management, Fidelity Investments and Baillie Gifford, the person said. A portion of the funds will be used to buy back stock from employees and previous investors, including Bain Capital Ventures, Spectrum Equity and TPG Growth.

SurveyMonkey could use the new funding to expand its tools for corporate customers. First offered a year ago, SurveyMonkey’s enterprise product gives businesses more analytics around survey results, lets them allocate billing to departments and works with other software like Salesforce.com Inc.

The company could also use its cash to ramp up mergers. SurveyMonkey made its first acquisition in more than two years in August, when it bought smaller Canadian rival Fluidware for more than $20 million.

Previous investors, including Google Capital, Iconiq Capital, Tiger Global Management and The Social+Capital Partnership, all participated in the new round of funding, according to the person with knowledge of the deal.

SurveyMonkey was last valued at about $1.3 billion in a round of funding in January. The startup has raised more than $1.2 billion in debt and equity as it puts off an initial public offering.

The cynics will say that an early stage company that has issued more than US$1.2 billion of debt and equity securities, and is “only” valued at US$2 billion, doesn’t hold a candle to Facebook or Google. The larger point is that the money management world is so awash with cash that a company that had US$113 million of revenue in 2012, which is small by global standards, can pull this off. As asset allocation decisions go, can you blame them, given the recent rout in the commodities markets? Private tech looks like a far safer place to be right now than oil and gas.

Last week’s BuildDirect financing may well have been another example, as BMO Asset Management was cited as a new investor in that company’s recent $50 million offering, along with existing VC firms Mohr Davidow Ventures and OMERS Ventures. Although it hasn’t been reported on, the use of BMO Asset Management in the press release, rather than BMO Capital Partners, leads one to believe that the BuildDirect shares went into the hands of high net worth clients, rather than the bank itself (as was the case with the 2013 financing of Real Matters, for example).

Some have called this trend a “democratization” of the markets, although I think that’s misplaced. When firms such as Fidelity and T. Rowe Price acquire the shares of private companies, they are definitely giving private company entrepreneurs more staying power, just as our own Growth Capital financings do at Wellington Financial. The recent track record suggests this cohort of investments will play out better than the local 2000-2001 vintage did, when many private companies raised large rounds (such as Eletrofuel and Metrophotonics), only to fritter the capital away.

MRM