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Why Google Capital deal could augur the reemergence of so-called PIPEs


Last Wednesday, Google Capital ventured into the world of investing in publicly traded companies, announcing it has backed Care.com, a platform that connects people with caregivers which went public in early 2014.

With Google Capital investing $46.35 million, it became Care.com’s single largest shareholder, according to The New York Times. The deal also sent nine-year-old Care.com’s shares soaring. On the day of the announcement, Care.com was valued at $278 million; by the end of trading on Friday, the company’s market cap had reached $508 million.

It might have seemed interesting, if unremarkable, to some industry watchers. Others, however, think the deal may well usher in a new era of private investment in publicly equities, or PIPE deals, despite their checkered history.

Those who’ve been around for a boom and bust (or two) are already familiar with them. PIPE deals became increasingly attractive in the aftermath of the late 1990s tech bubble, when the public market shut for tech companies, stranding not only ambitious startups hoping to IPO but publicly traded outfits, too.

Faced with few options, some of those cash-strapped companies turned to outside investors like venture investors and hedge funds. In return for capital, the companies typically provided their public shares at a discount — along with the promise that if its shares were to fall in value, these new investors would be provided more shares to make up for their losses.

In some cases, things worked out well. Phil Sanderson, today a managing director at IDG Ventures, was working as a partner at Walden Venture Capital at the time and says he led two investments in publicly traded companies that provided quick, meaningful returns to the firm. One of those bets was on VitalStream, a content delivery network that was later acquired; the other was the IT management company Niku, also acquired.

Sanderson says the two companies produced a “3x to 5 x return in a two- to three-year period,” and he credits those returns with approaching both firms with a VC-like mentality. “I’d join the board, bring in sales, help recruit employees. I would also communicate to analysts I knew about the company, and I’d be out there talking with hedge funds, getting them to buy and build positions in the stock. It was a lot of work but it paid off.”

Other companies weren’t so lucky. Recalls one late-stage venture investor, speaking not for attribution, “PIPEs started off in a positive way, but the sort of ‘amoral’ hedge funds moved in, investing in companies without even knowing what the company did because these deals were structured in a way that [the funds] wouldn’t lose money. It worked out for the them, but it was a deal with the devil for the companies.”

Public market investors caught on, too, often punishing companies for such deals, sending their stocks lower and, conversely, boosting hedge funds’ ownership in the process. Sanderson calls them “spiral death deals. The hedge funds just wound up owning more and more of the assets, then just sold them.”

Whether Google Capital can turn around investors’ perceptions of PIPEs remains to be seen, including because last week’s deal was unique in many ways. For example, Google paid a 24 percent premium for Care.com’s shares, rather than a discount. It also bought back 3.7 million shares from one of Care.com’s early backers, Matrix Partners.

“I don’t know the underlying motivations,” says the late-stage investor of Google Capital. He notes that Care.com has had trouble growing as a publicly traded company and that there wasn’t enough “daily float” — meaning shares being traded — for Matrix to distribute its holdings to its limited partners. (Typically, once a venture firm releases shares to investors in a startup that has gone public, those LPs cash out of their holdings. In this case, they would have likely torpedoed Care.com’s stock price because its trading volume is so light.)

Either way, what other investors are busily noting is the outcome: Care.com’s shares rose last week because Google is perceived as smart money. If Google Capital thinks there’s upside in this deal (the thinking seems to be), the shares might have been underpriced.

The deal has “certainly signaled to the market that [Care.com] isn’t a dud,” says the late-stage investor. “Maybe it can remove the taint from PIPES.”

Sandy Miller, a longtime general partner the late-stage firm Institutional Venture Partners, seems to think it’s possible.

Though Miller notes that –unlike in the post dot.com era —  it’s not nearly so difficult for most public companies to raise additional funding right, he also observes that the current market is “bifurcated,” with some “top tier companies that can easily money should they need to but other companies with good fundamentals that are trading at lower fundamentals. [They] could be very good candidates for the active reemergence of PIPEs.”

It’s something “IVP would consider, definitely,” Miller says.

IDG’s Sanderson says he’s suddenly thinking about PIPEs again, too.

“I do think Care.com could open up opportunities for VC. You can [access] healthy companies at a better valuation [than in recent years], and most venture funds have the ability to do them. You just have to explain to your [LPs] that you’re applying a venture model. You aren’t just picking stocks.”

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