Investors create start-up baby boom looking for the next big thing

What a difference a year makes. Less than 12 months after investors valued Snapchat, the red-hot messaging app, at about $10 billion, the startup 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 multibillion-dollar heights, including virtual scrapbooking service Pinterest and ride-hailing app Lyft. Uber, Lyft's main competitor, has raised more than $3 billion in the past year and has a 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 eager to catch the next blockbuster company like Facebook.

Boom and bust

The action is also spurring talk that overeager investors are poised to relive the dotcom 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 on for the next “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 data firm CB Insights.

Digi-Capital, a mobile Internet advisory firm, estimates that the total value of start-ups worth $1 billion or more increased $28 billion in 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 venture capital firm Benchmark who is also an investor in, and one of the most vocal proponents of, Uber. "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.

In recent years, some of the high-flyers 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 source.

Snapchat is also considering raising $500 million at a valuation of up to $19 billion, according to another source. Although 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, 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 per cent 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 per cent, 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 more recently the mutual fund companies have been big investors in start-ups like Uber, looking to tap into phenomenal growth.

Overnight sensations

Executives at these mutual funds say they have 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 – which has made it possible for start-ups to become nearly overnight sensations, moving much faster than they would have 15 years ago.

Now, however, 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. – (Copyright New York Times service 2015)