Larosa Group Wary of New VC Trends
The Fear of Missing Out In the 'Private IPO' Market Is Fueling Valuations.
- (1888PressRelease) February 24, 2015 - It is this infectious fear of missing out, according to some venture capitalists that has created a flotilla of billion-dollar startups with ever-soaring valuations and mixed financials.
According to The Wall Street Journal's Billion Dollar Startup Club, there are now at least 73 private technology companies worth more than $1 billion dollars, versus 41 a year ago. Some, such as Uber, the $41.2 billion car hailing app backed by Gurley's Benchmark, are worth enormous sums. At least 48 companies were valued at $1 billion or more for the first time, and another 23 members moved up the ranking after raising more money.
Many investors are treating these 73 companies as if they were publicly traded. They are investing sums of money usually reserved for IPO offerings and, sometimes, giving away those dollars with the kind of confidence usually associated with investors who've perused regulatory filings for detailed financial information. The investors themselves are a blend of traditional venture-capital players and typically public-market investors: hedge funds, mutual funds and banks. They are sort of meeting in the middle, with the venture capitalists investing in later-stage companies than they have historically done, through new growth funds, and the institutional investors getting in before the IPO.
"We've been calling this the private-IPO slice," said David York, managing director of Top Tier Capital Partners, a fund of funds. "The valuation of risk is a public-market thought process versus a private-market thought process."
There is a worry of irrational behavior in the industry, especially with regard to the pile-up in the "private IPO" market. The concern is that venture capitalists' new bedfellows, such as mutual funds, are too new to venture capital to properly weigh the risks and realize that these billion-dollar companies are not guaranteed home runs.
According to data collected by The Journal, of the 29 firms that have invested in five or more current billion-dollar startups, only about half are traditional venture-capital firms. The rest are a mix of institutional investors, such as the Dragoneer Investment Group and Tiger Global Management, and strategic investors, such as Intel and Google. Near the top of the list is Tiger with 12 investments in private billion-dollar companies, and T. Rowe Price Group with 11. In this group, Tiger also raised the most money last year, keying up $4 billion, or 12% of all venture capital raised in 2014.
With such financial heavyweights jumping in, many of their peers are wondering: Can I afford to sit out?
It's difficult to quantify exactly how much money is sloshing around at this level. Several top venture capital firms have raised large growth funds in the past few years, but total contributions from hedge funds, mutual funds and banks is practically immeasurable without knowing how much each invested in particular funding rounds. Whatever the amount, this layer of growth capital could warp prices, venture capitalists say.
"It's like traffic on the highway, you add just 5% more cars and it slows down traffic considerably," said Glenn Solomon, a managing partner at GGV Capital. His firm is an investor in four companies in The Billion Dollar Startup Club.
Larosa Group find it worrying that the industry has somewhat forgotten the value of going public, and the protections it provides for both founders and investors. It's also a worrying trend that a founder pursuing a $40 million IPO offering takes the process more seriously today than a founder raising $400 million in private capital.
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