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has raised $4.6 billion across two growth funds in 2022, the largest growth funds raised in its 22-year history, in a market where large fundings at high valuations have slowed significantly.

Now, the Silicon Valley-based firm founded in 2000 with offices around the globe just needs to decide how to spend it all.

We spoke with partner , who joined Lightspeed more than three years ago to create a practice around follow-on fundings. This reinvestment team is a new program which runs a fundraising bootcamp for聽 portfolio companies to plan their next funding. The team has been involved in roughly 200 deals in three years鈥攁round 65 deals a year.

鈥淢y job is 80-20. I need to pick the winners,鈥� said Ephrati, referring to the firm鈥檚 investment into portfolio companies. 鈥淭hat’s how I lose money, if I don’t double down into the right opportunities in our portfolio.鈥�

One of these opportunities for Lightspeed was an extension round into , an identity verification platform used by banks and financial institutions. Lightspeed led the initial Series C of $100 million, which valued the company at $1.4 billion in 2021. A C-extension a year later in September 2022 added $52 million in funding with a $100 million valuation uptick at a $1.5 billion pre-money valuation led by Lightspeed Venture Partners and new investor .

鈥淲e didn’t see it as just a bridge or an extension,鈥� said Ephrati on the investment. Rather, Lightspeed鈥檚 investment answered a crucial question: Did the firm want to increase its exposure in this company? The answer in the case of Alloy was yes.

Ephrati鈥檚 reinvestment team plays a crucial role in such decisions. The team鈥檚 goal is twofold鈥斺�渢o work with founders as thought partners on their journey to build a large business,鈥� said Ephrati, and 鈥渢o independently challenge the follow-on decision and the growth investment that we make.鈥�

The three-person team supports portfolio companies by honing pitch decks, building a data room, benchmarking performance, stress-testing operating plans, and ultimately brokering introductions with investors. The team typically looks two years out. Further out is more difficult to predict as you are not able to control all the variables, said Ephrati.

Prior to this most recent fund close, the firm has spent around $3 billion in growth dollars over the last two years with around 60% of that committed to portfolio companies.

2021 in hindsight

Last year, as public markets traded high, private valuations trended up as investors deemed private companies on par with the market.

And fast decision-making was at a premium.

Growth investors could basically look at three to four key performance indicators, Ephrati said. What’s your growth rate? How much are you burning to achieve that growth rate? What is your sales performance or your go-to-market efficiency? And then what’s your net retention? A company鈥檚 answers to such questions, along with customer interviews, help investors make their decision.

All those rounds in 2021 valued at over $5 billion are sparking concerns today, Ephrati said. Investors are fretting that some of these companies are not close to the growth trajectory of publicly traded companies in their space. Examples of fast-growing public companies include restaurant management platform (valued at $8.9 billion), customer engagement platform (valued at $3.3 billion), and product intelligence platform (valued at $1.6 billion) as of Sept. 23.

Such concerns mean that many highly valued private companies will need to fix the burn or accelerate growth to meet investors鈥� expectations.

What to do in 2022?

After a searing 2021, this year will demand different strategies for both private companies and investors like Lightspeed.

鈥淭here’s just been a huge wave of companies asking for extension or convertible notes in order to kick the can down the road, because no one is able to price accurately right now,鈥� said Ephrati.

One of the questions Lightspeed has to answer is whether to invest another $30 million in a particular company at a $5 billion valuation, knowing that few companies go public above $20 billion. The team will model 4x to 5x return on growth investments.

Despite the changing market, Lightspeed鈥檚 model for assessing companies remains the same in 2022.

鈥淚 think we’re just more price conscious,鈥� said Ephrati.

In a funding environment where public market comps are down significantly and funding has slowed, 鈥淚 think we’re doing a great job making deals happen versus waiting for deals to happen,鈥� he said.

James Ephrati is a board observer for the following portfolio companies , , , , , and .

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Illustration: Dom Guzman