Investors Create a Billion-Dollar-Baby Boom
Less than 12 months after
investors valued Snapchat,
the red-hot messaging app, at
about $10 billion, the start-up
is again in the market for
money — and poised to
nearly double that valuation.
A range of other popular
start-ups are also poised to
propel their net worths to
similar multibillion-dollar
heights, including the virtual
scrapbooking service
Pinterest and the ride-hailing
app Lyft. Uber, Lyft’s top
competitor, has raised more
than $3 billion in the last year
and now has an eye-popping
valuation of $40 billion.
Giant sums of money and sky-
high valuations are nothing
new in the technology
industry. But the latest burst
of activity has put on clear
display the frenzied pace of
investors, who are eager to
catch the next blockbuster
company like Facebook. The
action is also again spurring
talk that overeager investors
are poised to relive the dot-
com boom and bust at the
turn of the century, when
overinflated start-ups led to a
quick and painful downturn.
For investors, the hunt is for
the next proverbial so-called
unicorn, a nascent business
worth $1 billion or more —
on paper, at least.
Just last year, 38 privately
held companies backed by
venture capital joined the
billion-dollar club, putting
the membership of that
group at 54, according to the
data firm CB Insights. Digi-
Capital, a mobile Internet
advisory firm, estimates that
the total value of mobile
Internet start-ups worth $1
billion or more increased $28
billion in just the last quarter
of 2014.
“The grand experiment that
we are running right now is,
Can you cram hundreds of
millions of dollars into 80 or
90 different private
companies and have it end up
well?” said Bill Gurley, a
partner at the venture
capital firm Benchmark who
is also an investor in and one
of the most vocal proponents
of Uber.
He added: “For some, I think
it will end badly.”
Billion-dollar companies
were once considered rare.
But they are quickly
becoming more
commonplace. Case in point:
Slack, the workplace
collaboration start-up, hit the
billion-dollar valuation mark
just eight months after
introducing its service. And
at $46 billion, Xiaomi, the
Chinese smartphone giant
that started just five years
ago, is the most richly valued
private tech company in the
world.
Even in recent years, some of
the highfliers have landed
hard. Fab, an online retailer
once valued at close to $1
billion, is now reportedly
close to being sold for less
than $20 million.
Yet the stories of failure have
not dented investor appetite
for the brightest stars in the
start-up firmament.
Pinterest, the social
bookmarking site, is in talks
to raise $500 million at a
valuation of more than $10
billion, according to a person
with knowledge of the
discussions.
Snapchat, too, is considering
raising $500 million at a
valuation of up to $19 billion,
according to a person briefed
on those talks. Though the
company, best known for
teenagers flocking to its
disappearing messages, has
been collecting revenue from
advertising for less than a
month, the promise of its
business has excited many in
the tech and media
industries.
“I know it’s an ephemeral
platform, but my 14-year-old
spends half her life there,”
Jeremy Zimmer, the head of
the United Talent Agency,
said at an industry
conference, Code Media, this
week.
The size of investments has
clearly picked up. About
$48.3 billion was invested in
2014, up 61 percent from the
same time the previous year,
according to a report by the
National Venture Capital
Association and
PricewaterhouseCoopers. But
that money went into 4,356
deals, up only 4 percent,
suggesting that more of that
capital is going into fewer —
and bigger — rounds.
Investors have been eager to
raise even more money to
pour into start-ups.
Dedicated venture capital
firms raised nearly $30
billion last year, a level
untouched since 2007,
according to Thomson
Reuters.
Much of the money that has
helped inflate the latest
rounds of financing has come
from mutual fund giants like
BlackRock, Fidelity and T.
Rowe Price, known for years
for buying shares in start-ups
once they go public. But
lately the mutual fund
companies have been big
investors in start-ups like
Uber, looking to tap into
phenomenal growth.
Executives at these mutual
funds say that they had long
sought to move into the world
of venture capital. But they
really gained access in recent
years as the size of the
investments in start-ups grew
into the tens of millions of
dollars or more — enough to
meaningfully affect their
investment returns.
Part of what drives the
bigger investments, investors
say, is the advent of today’s
technology — high-speed
Internet connections, the
ubiquity of smartphones,
modern social networks —
that has made it possible for
start-ups to become nearly
overnight sensations, moving
much faster than they would
have 15 years ago.
Now, with millions of people
using their products and a
fertile investment
environment, these start-ups
are willing to stay private for
much longer than they may
have years ago.
“It used to be if you wanted to
raise the ultimate round of
capital, it was only available
on the public markets,” said
Mark Suster, a partner at
Upfront Ventures. “But
because these companies are
becoming so big, they don’t
need to go public quickly, and
they’re raising capital in the
private markets that they
would have in the public
markets.”
Many of these investors,
according to those on Wall
Street and in Silicon Valley,
are willing to invest at huge
valuations because they plan
to sell their shares soon after
start-ups go public.
But not all participants in the
latest mega-rounds want to
cash out quickly. Some, like
Henry Ellenbogen, are into
these companies for the long
haul.
Mr. Ellenbogen, the head of
the New Horizons fund at T.
Rowe Price and an investor in
Twitter before it went public,
put it best in his letter to
investors late last year: “We
prefer private companies
that we would want to own
more of on the I.P.O., not
less.”
