Round D financing is very late stage capital raising, generally by companies whose IPO seems imminent. These fundraising rounds can be seen as “quasi-IPOs,” potentially providing founders and other early investors with some of the liquidity they would traditionally have sought through an IPO.
Q. So, with Zynga and other tech companies we’re suddenly hearing a lot about “Round D” financings. What are they, exactly?
A. Round D refers to very late stage capital being raised by companies that are expected to go public, often through private market networks like Second Market, SharesPost, Xpert Systems, or the new platform Cantor Fitzgerald has announced.
Q. But there have always been multiple rounds of institutional funding for big successful ventures, right, so what’s really new here?
A. “D Round” financings have changed the game quite a bit, essentially providing a “quasi-IPO” route to these firms. Traditionally, companies were in a big hurry to IPO for several reasons, but frequently so their founders and early funders could partially cash out. That’s much less true now, because private investors are now providing the liquidity the founders and early funders want to see.
Q. And I guess a lot of these tech companies also don’t really need to raise huge amounts of capital to fuel their business models…
A. Exactly, its nice to have a pile of cash, but frequently not necessary. That’s another reason traditional IPOs just aren’t as important as they used to be. One of the slightly odd aspects of this “D Round” route, though, and one that’s driving the phenomenon, is that today investors are willing to buy shares in new companies with very little data about the company’s prospects: often, in fact, the company is not a party to the deal, and is providing no information at all. And, of course, subsequent liquidity by the investor is very limited unless the company does indeed go public for real.
Q. So, from an investors point of view, this may not be the ideal way in.
A. It’s certainly not as safe. But lots of institutional investors in particular feel that they “have” to be in on some of these hot deals, and they feel that they’re still getting the stock at a discount to what they expect to be the IPO price… just not as much of a discount as was historically true before these transactions and markets became popular.
Q. On the other hand, these sorts of deals are very attractive to the insiders and the companies, right?
A. Definitely. No Sarbanes-Oxley, no roadshows, no quarterly reporting pressures, and, very importantly, they frequently have control over who their investors are through a “ROFR”.
Q. A “ROFR”?? That sounds like another buzzword that we can leave till tomorrow, but let’s pick it up there, OK?