Uber
raised a total of more than $2 billion from investors in June and
December last year — and is now back for another round. The anonymous
messaging start-up Yik Yak collected $73.5 million in three financing
rounds in seven months, and Zenefits, a human resources start-up, raised
more than $580 million in less than two years, with the latest deal
done last week.
The
pace of technological change has long been happening at the
lightning-fast speed of the Internet. Now, start-up financing is
increasingly taking place at that speed as well.
Uber
is just one example of the quickening tempo. The ride-hailing company
is in discussions to raise around $1.5 billion in financing, which could
value it at $50 billion. Just five months ago the company collected $1.2 billion for its war chest, an amount that later swelled with the addition of a strategic investor.
And
the rate of fund-raising by Uber — and across the start-up landscape —
has little precedent, driven by money pouring in from hedge funds,
strategic investors and more, and by the willingness of entrepreneurs to
embrace the cash.
“When
capital markets are this loose, people tap them, whether it’s right to
or not,” said Mark Suster, a partner at the venture capital firm Upfront
Ventures. “Companies are raising rapid rounds of capital for only one
reason: They can.”
The
frequency of the fund-raising by many start-ups — now multiple rounds
in months rather than years — is “otherwise unheard-of,” said Anand
Sanwal, chief executive of CB Insights, a research firm that studies
venture capital.
The
shrinking time between funding rounds shows how Silicon Valley’s
current boom is not just about start-ups reaching a high valuation but
also about how fast they can pull that off. The tempo is in marked
contrast to the pace of start-up fund-raising last decade, when many
companies would typically leave a year or two between financing rounds.
When LinkedIn, the professional social networking company, raised money
as a start-up in the mid-2000s, it took more than three years for its
first three rounds of financing.
Since
the beginning of 2013, however, more than 20 tech start-ups have held
three rounds of funding within a year and a half, according to CB
Insights, which called the group the “18-month sprint” companies. Last year, nearly 500 tech start-ups did financing rounds less than one year apart, CB Insights estimated, more than any other year since at least 2011.
Among
the companies that completed numerous financings in tight time frames
was the fitness membership start-up ClassPass, which completed three
rounds in nine and a half months, CB Insights said. Slack, the
collaboration software start-up, last month took in $160 million; just six months earlier, it had received $120 million
from investors. Snapchat in December raised nearly half a billion
dollars from a bevy of financiers. Just three months later, the Chinese
e-commerce company Alibaba poured $200 million into the messaging
start-up.
Spurring
the more frequent fund-raising is the desire of investors — including
hedge funds, mutual funds and strategic investors — to put up money more
often for fear of missing out on the next big thing. One reason Uber is
in talks to raise money again just a few months after a prior round is
because of an overwhelming amount of investor interest, said a person
with knowledge of the company who spoke on the condition of anonymity
because the process is confidential.
Uber did not immediately respond to a request for comment.
Many
institutional funds and international companies have leapt into
start-up investing as the number of initial public offerings has slowed,
prompting investors to wade into private companies to find growth,
according to Mark A. Siegel, managing director at the venture capital
firm Menlo Ventures, which has invested in Uber.
Graphic: Special Section: The Rise of the ‘Unicorns’
“I
don’t blame entrepreneurs,” Mr. Siegel said. “This is something where
investors are absolutely complicit in this, and in some ways are driving
this.”
He
added that the phenomenon of fast fund-raising appears largely limited
to the club of “unicorns,” or the elite companies that are worth at
least $1 billion. Investments in the later financing rounds for
companies jumped to $4.2 billion in the first quarter, up 50 percent
from a year ago, according to data from the National Venture Capital
Association, making it the biggest quarter for such investments since
late 2000.
Entrepreneurs
are often happy to take up eager investors on their offers. Stewart
Butterfield, chief executive of Slack, recently said that his start-up had more than enough money in the bank — just before collecting $160 million more.
“This
is the best time to raise money ever,” he said last month. “It might be
the best time for any kind of business, in any industry, to raise money
for all of history, like since the time of the ancient Egyptians.”
Mr.
Butterfield said Slack had “no immediate use” for the new money it had
just raised. Still, the capital “reinforces the perception for our
larger customers that we’ll be around for the long haul,” he said.
Parker
Conrad, chief executive of Zenefits, said rapid-fire fund-raising is
necessary to quickly build up a company so it is large enough to take on
competitors. With the money, Zenefits has been able to persuade more
than 10,000 small and midsize businesses to use its service.
“We want to grow really big, really fast,” Mr. Conrad said in an interview last week for the company’s third round of fund-raising since early 2014. “That requires a lot of capital.”
Even
if the numerous rounds of new cash are not put to immediate use, the
money may come in handy one day if — or when — the free-flowing capital
faucets are shut off. Investors like Bill Gurley, a partner at the
venture capital firm Benchmark, have warned of an eventual reckoning, a time when money is not as easy to come by, which will cause some companies to sputter out when their bank accounts empty.
It
is to protect against this inflection point that some companies may be
raising as frequently as they can, while they can, said Mr. Suster of
Upfront Ventures.
“Some
companies view these as war chests being raised to weather the
inevitable corrections,” he said. “For now, the tide is high and nobody
knows who’s naked.”
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