A Blog by Jonathan Low

 

Apr 19, 2018

Investment Floods Startups - Underappreciated or Overvalued?

FOMO - fear of missing out. JL

Eliot Brown reports in the Wall Street Journal:

SoftBank is injecting billions of dollars into tech, causing deep-pocketed global investors - and U.S. venture firms - to respond. A record level of late-stage money is flooding in, threatening to keep some startups out of the public markets even longer while heightening concerns that the sector is overvalued. The flood of money is richest for late-stage startups, but is starting to trickle down to younger companies. “We’re encouraging the excessive use of capital. We’re all doing it because it’s the game on the field.”
When Tony Xu, chief executive of food-delivery company DoorDash Inc., began raising funding late last year, he told investors he expected to raise up to $250 million to support his growing, five-year-old business.
He misjudged the market. SoftBank Group Corp. and Singapore sovereign-wealth fund GIC, both competing to invest heavily in startups, pushed up the size of the fundraising round to $535 million, people familiar with the deal say.
The Silicon Valley money machine is once again in high gear, thanks largely to SoftBank. The conglomerate is injecting billions of dollars into tech, in turn causing deep-pocketed global investors—and some U.S. venture firms—to arm up in response. A record level of late-stage money is flooding in, threatening to keep some startups out of the public markets even longer while heightening concerns that the sector is overvalued.
In recent months, hotly contested companies like ride-hailing service Lyft Inc. and dog-walking app Wag Labs Inc. have received hundreds of millions of dollars more than they sought. Bidding wars are re-emerging, and some once-staid foreign investors are expanding U.S. offices and ditching their ties and suits to court talented entrepreneurs.
“The top companies have as much heat around them as ever and continue to get bid up,” said John Locke, who runs late-stage investing for venture-capital firm Accel Partners.
From January through mid-March this year, a quarterly record 102 U.S. startups had raised at least $50 million each, totaling $16 billion, according to PitchBook. The prior quarterly high was 91 deals in the third quarter of 2015.
The activity marks a shift from two years ago, when the Silicon Valley startup market chilled amid the realization that private valuations had often been higher than what companies received from public markets, leading to a number of lackluster tech IPOs. Venture capitalists began demanding companies focus on revenue and profit rather than user growth, and investment fell, particularly from mutual funds.
Then came SoftBank’s $92 billion tech-focused Vision Fund, launched last spring. Backed largely by sovereign-wealth funds in Saudi Arabia and Abu Dhabi, the fund in the past year has invested more than $36 billion globally—more than the $33 billion the entire U.S. venture-capital sector raised last year, according to PitchBook.
Meanwhile, those two sovereign-wealth funds, alongside some retirement funds, have begun investing in startups directly, rather than through venture funds. Abu Dhabi fund Mubadala Investment Co. opened a Silicon Valley office last year, while the Saudi fund has talked about expanding its U.S. staff.
The Qatar Investment Authority last year recruited a Morgan Stanley tech investment banker to start hunting for investments in late-stage startups, people familiar with the fund said. It has told entrepreneurs it is looking to write large checks often of $100 million or more, they said.
The big-check bug has spread to U.S. venture-capital firm Sequoia Capital, which is in the process of raising up to $13 billion, including an $8 billion fund for late-stage companies, the largest ever for a U.S. venture-capital firm.
Sequoia was previously content with smaller sums; its largest fund to date is $2 billion. But it made the decision last year to go bigger, seeing an opening to keep investing in companies as they stay private longer and grow larger.
This flood of private investment has heightened concerns it will create a shaky foundation for startups. When money rushes into Silicon Valley, startups historically have overspent by advancing into expensive new markets or battling with competitors in price wars.
“We’re encouraging the excessive use of capital,” Bill Gurley, a partner at Benchmark, said of venture capitalists at a February tech conference. “We’re all doing it because it’s the game on the field.”
SoftBank also faces pressure to find deals where it can spend heavily, and executives have told startup entrepreneurs the Vision Fund doesn’t invest less than $100 million.
Late last year, Wag Labs—like an Uber for on-demand dog walking—was out looking for more than $50 million. SoftBank Vision Fund executive Jeff Housenbold learned the company was negotiating with an investor for more than $100 million, according to people familiar with the matter.
Wielding a $300 million offer, Mr. Housenbold gave the company the ability to expand rapidly internationally. Wag took the deal.
When DoorDash began looking for money last fall, SoftBank became interested quickly, but so did another well-funded investor: GIC, the Singapore fund. A compromise was reached: They would both invest, giving DoorDash around $300 million more than it expected, said the people familiar with the deal, which was announced in March.
GIC had been keeping a low profile in Silicon Valley, but it has made noisier plays for private companies amid the competition. In mid-March, it hosted its first event for startup founders, in a bid to show off its network of contacts and partners. The three-day confab featured talks from tech luminaries like Sun Microsystems founder Vinod Khosla and a party with lamb sliders at a packed San Francisco restaurant.
The flood of money is richest for late-stage startups, but it is starting to trickle down to younger companies too. The 22-location hostel chain Selina, which offers beds and co-working space for “digital nomads,” sought $50 million to expand last fall, said co-founder Rafi Museri. It ended up with $95 million of equity and debt led by Dubai-based Abraaj Group, and now it plans to expand to some 50-plus locations.
Companies that haven’t released a product yet are raising big checks: Magic Leap Inc., which is still developing its “augmented reality“ glasses after seven years, last month raised $461 million, bringing its total raised to $2.3billion.
The main investor: a Saudi Arabian sovereign-wealth fund.

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