It’s a gold rush out there.
New funds and investors are putting an unprecedented amount of capital into the private market. This uncharted landscape presents new opportunities—and new challenges—for startups and investors alike. A panel of private-market investing experts at Fortune’s Most Powerful Women Summit, which kicked off in Washington, D.C. Monday, discussed how the flood of capital is changing investing.
“Ten or fifteen years ago, there were like five competitors in the market. Now there's like fifty,” Heather Smith Thorne, partner at TPG Growth, said. “The problem is that these guys are young.” Many competitors haven’t found their footing yet.
“It’s great that there’s been a lot of capital,” Hilarie Koplow-McAdams, Venture Partner at NEA, began. However, she continued, the question was how startups used such proceeds. “Like raising children, if you have no limits you get a wide range of behaviors. Capital is relatively easy to come by, so they should think about, what firm do I partner with? For those advising them on growth strategies, we have to ask important questions on the use of proceeds: What do your unit economic strategies look like?” She noted that this was not a one-size-fits-all question—different business models have different economic models beneath them. She suggested that sometimes a lot of capital was necessary if taken into the context of a specific growth strategy.
A lot of startups, she continued, wanted what she called the “peanut buttering effect,” in which “everyone gets a little” of the fresh capital. That’s opposed to the hard work of prioritizing where best to deploy capital.
“I ask how they they invest in people by function,” Koplow-McAdams said. “How do you measure how they’re successful? That gives people pause.” She said oftentimes, people have thought about functions of roles, but they haven’t thought about how to deploy that resource. That’s where the prioritization exercises come in.
Another big issue on everyone’s radar: the trade-off between profitability and growth. In recent years in public markets, profitability has been overlooked for growth. That’s resulted in some snafus—the most lurid and late example being that of WeWork’s failed attempt at an IPO.
“Private markets are heavily influenced by what happens in public markets,” said Patricia Nakache, General Partner at Trinity Ventures. “There’s always a pendulum swing in private markets. We have swung way out towards growth at most costs. But now public markets have weighed in and resoundingly said, this has gone too far. We need to clear a path for profitability and we need to recalibrate.” Nakache spoke to a trickle-down effect from Wall Street to early stage. Now, she said, this ethos was trickling down to late stage. At the same time, she cautioned, “It’s a mistake in private markets to go from extreme to extreme.”
The other panelists, which included SoftBank’s Lydia Jett, agreed. “We’re always searching for equilibrium,” Koplow-McAdams said. “What are true cost margins if you weren’t in growth mode?” Private or public, she believes in investing for growth as long as a good look is given to underlying levers underneath growth margins to see whether there is elasticity or underlying risk.
“It’s not about losing money. It’s how you lose the money,” Smith Thorne joked to knowing laughter in the room. “So lose it thoughtfully.”