Snowflake has yet to make $1bn in annual revenues, but it is already set to deliver a historic payout for Silicon Valley venture capitalists.
Private investors in the software company are collectively sitting on more than $48bn worth of shares, according to a Financial Times analysis, in what would represent one of the largest hauls ever for early tech investors.
On Thursday, some early backers will be able to begin selling a portion of their holdings, though the company’s largest investors could still be prevented from immediately cashing out.
Sutter Hill Ventures, a closely-held Silicon Valley group with origins dating back to the semiconductor boom of the 1960s, is set to be the biggest winner from Snowflake’s listing, holding a stake worth $13.3bn when counting shares held by the fund and its individual partners and affiliates.
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Compared to similar venture capital partnerships, Sutter Hill’s partners hold an outsize chunk of the fund, according to people familiar with its operations, meaning Snowflake could produce larger than usual gains for the individual venture capitalists.
Sutter Hill is structured as an “evergreen” vehicle, a set-up that allows it to recycle proceeds into new bets and potentially hold on to winning investments for longer than traditional venture funds. It has also become known for its hands-on approach, helping form companies such as Snowflake as their first investor.
“What they really are is a collective of angels,” said the tech investor Naval Ravikant, using a term for individual investors in early tech companies. “It’s hard for us to wrap our heads around the fact these angels are managing billions of dollars.”
Mr Ravikant, whose investment fund Hit Forge is backed by Sutter Hill, said the group’s investment in Snowflake could result in one of the biggest venture “exits” in history.
Cashing out
Snowflake’s software product, which allows companies to remotely store and analyse large data sets, has proven wildly popular in public markets as investors clamour for businesses benefiting from the shift to remote working.
The company’s share gains are an example of the huge proceeds venture capitalists are expected to reap from a series of blockbuster tech listings, after the coronavirus pandemic initially led to a pause in exits such as sales or initial public offerings.
Early investors in companies such as the travel app Airbnb and meal delivery company DoorDash will largely have to wait until well into this year to convert their stakes into cash, due to restrictions that usually prevent insiders from selling shares up to six months after an IPO.
But Snowflake’s 123 per cent stock appreciation since its September listing has already triggered a premature easing of restrictions, allowing some of its early backers to sell up to one-quarter of their holdings. The company said in a securities filing that as many as 37.9m shares could be sold beginning on Thursday.
Board members, employees and close affiliates of the company will be restricted from selling, likely preventing large shareholders such as Sutter Hill from immediately cashing out. Snowflake declined to comment, and Sutter Hill did not respond to a request for comment on the lock-up period.
Alan Denenberg, a California-based partner at the law firm Davis Polk, said Snowflake’s approach could solve some of the problems with traditional “lock-up” periods, which often result in a large amount of selling. “This way, you kind of ease the burden” on investors waiting to realise gains, he said.
‘The returns can be spectacular’
While some other large tech companies such as Facebook and Uber have faltered after going public, Snowflake has already made its $12.4bn valuation in private markets look relatively cheap.
In the 12 months to October, Snowflake made revenues of less than $490m, meaning investors are valuing it at more than 150 times that metric.
Sequoia Capital, which passed on Snowflake’s early rounds of funding, is still sitting on gains of more than 20 times its roughly $270m investment in the company’s final rounds of private financing, according to Financial Times analysis.
Meanwhile, Sutter Hill’s investment in Snowflake has reaped unusually large rewards for the group’s individual partners.
Michael Speiser, who led Sutter Hill’s investment in Snowflake, controls shares worth almost $1.4bn through trusts and his personal holdings. At least three other Sutter Hill partners also control personal stakes that would be worth hundreds of millions of dollars, according to securities filings.
In 2012, Mr Speiser began as Snowflake’s first chief executive and brought on former Oracle executive Benoit Dageville and two other founders, Thierry Cruanes and Marcin Zukowski, to develop its technology.
The so-called incubation process allowed Sutter Hill to build a large initial stake in Snowflake that it maintained through the company’s later rounds of financing, though it also required more work than a typical venture investment.
“It’s a lot less scalable,” said Peter Wagner, a founding partner at Wing Venture Capital, one of the company’s earliest investors. “But as you can see in Snowflake, the returns can be spectacular when it works.”
Sutter Hill, Wing and other investors in Snowflake’s seed financing paid $0.17 for their shares when adjusted for splits, according to the company’s incorporation documents, producing returns of almost 1,600 times on their initial investment.
The gains from Snowflake and other tech IPOs could provide some relief to investors in venture funds, who faced a cash squeeze last year as acquisitions and public listings slowed down during the depths of the pandemic.
Sequoia’s private investments in four of last year’s largest IPOs — Airbnb, DoorDash, Unity and Snowflake — have grown to $32.4bn in size, representing a massive haul for the group. It had previously warned companies that coronavirus would be the “black swan” event of 2020.
“If you have a long in the tooth venture fund that has a big pop in a DoorDash or an Airbnb, I would be inclined to be a patient [investor] and not put pressure on you if I know it’s building to this high point,” said Kathy Wanner, a founding partner of Fairway Capital Management, which invests in venture funds.
