Private start-ups break through billion-dollar barrier

By Nicole Miskelly | 10 November 2014

Over 40 private tech start-up companies have broken through the $1bn valuation barrier as investors clamour to get a piece of the hottest new tech companies. The Financial Times (FT) reports that the tech industry has a new billion dollar club that is no longer as exclusive when it comes to private start-ups. The report suggests that investors are pouring cash into private markets and the elite group looks set to grow quickly.

According to the FT, a new group of entrepreneurs have raised more than $1bn in new capital, some of which have valuations rising above $10bn in single rounds of fundraising. The only start-ups to achieve this over the past five years have been Facebook and Groupon, before they went public.  

Last week’s announcement that Uber (the taxi app) is setting out funding of around $1bn, a valuation that some predict could exceed $25bn which is almost 50 per cent higher than the level five months ago. According to the FT, Uber hopes to raise a higher valuation than the $17bn it secured in June, a figure which already made it the highest-valued private company in Silicon Valley. According to the FT, Uber’s aggressive approach to raising more capital is raising questions about how far private tech company valuations can rise.

The FT reports that Indian ecommerce company, Flipkart, raised $1bn in July and is seeking more funds. As is Xiaomi, the Chinese smartphone maker that is in direction competition with Apple and Samsung in Latin America, which is looking to raise $1.5bn and if successful, would make it the world’s most valuable private company worth around $40bn.

According to the FT, although these companies have different business models they all have one thing in common: they allow private investors the opportunity to invest in the continuing growth of the mobile internet which isn’t as widely available on public markets.

Lise Buyer (Ex-Google Employee) said that the fact that single fundraising rounds are suddenly soaring past $1bn is a result of the Jobs Act (recent US law) that made it possible for companies to greatly expand their shareholder bases without publically declaring it.

The FT reports that the impact has been a substantial structural change in capital markets and that mutual funds etc that usually only invest in public stocks are now investing in late-stage private  companies in the hopes of staking a claim before valuations rise. With investment funds, hedge funds and even wealthy families not wanting to miss out on the next big thing, it is allowing hot companies to raise billions privately and defer an Initial public offering (IPO) at a much later stage.

According to the FT, this situation is the reverse of the last tech boom, when young companies were put out onto public markets prematurely, which meant that everyday investors were left to pay when valuations came crashing back down. However, some investors in Silicon Valley that remember the dotcom crash in 2000 are watching nervously as money floods the tech industry from new sectors.

Will these companies succeed where others have failed? The FT reports that companies such as Uber and Xiaomi have extraordinary growth opportunities and the ability to demand a global reach and scale similar to those only seen by Facebook and Google.
 

By Nicole Miskelly, bobsguide Lead Journalist 

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