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News : Innovation Last Updated: Mar 2, 2015 - 8:02 AM


Silicon Valley insider warns of dodgy $1bn valuations of private companies
By Michael Hennigan, Finfacts founder and editor
Feb 22, 2015 - 3:37 PM

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Jason Goldberg, co-founder of Fab.com Source: businessinsider.com

A Silicon Valley insider has warned of dodgy $1bn valuations of private companies in a week when Uber, Snapchat and Pinterest were all reported to be involved in discussions on big fundraising rounds or had completed them.

The taxi app raised another $1bn from investors; the messaging app is reported to be in talks to increase funding at a valuation of $16bn; and the scrapbook site was reported to be seeking fresh capital at a $11bn valuation.

Bill Gurley, a partner at Silicon Valley’s Benchmark Capital and investor in Uber and Snapchat, spoke at a Goldman Sachs technology conference that he's worried low interest rates are encouraging inexperienced mutual funds to invest in late stage financing of private tech companies that haven't been subjected to the rigour of the IPO (initial public offering) process.

The Wall Street Journal reports that according to Gurley, one man at the conference who represented a large mutual fund, asked, “You don’t want us to invest in this but the big tech stocks are not delivering enough growth and my competitors are getting into these startups, so what are we supposed to do?”

The Journal reports Gurley said he didn’t have a good answer but he wasn’t surprised by the sentiment, which he describes as FOMO, a slang popular among millennials that stands for “fear of missing out.”

According to The Wall Street Journal’s Billion Dollar Startup Club, there are now at least 73 private technology companies worth more than $1bn dollars, versus 41 a year ago. Some, such as Uber, the $41.2bn car hailing app backed by Gurley’s Benchmark, are worth enormous sums. At least 48 companies were valued at $1bn 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, says Gurley. 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.

Writing in the Financial Times at the weekend, Bill Gurley said: "Eighteen months ago it was a company worth a billion dollars. Fab.com, an online store that sells quirky designs of everything from iPad covers to bonsai pots, had just been given another tranche of cash by a group of venture capital investors who seemed undisturbed by the company’s apparent indifference to making money. 'I don’t [care] if we sell $200m this year or $300m this year,' chief executive Jason Goldberg wrote after the deal closed. 'Wow first, money second.'"

The company is worth about $15m today.

FT: The billion-dollar companies Silicon Valley investors ought to fear

Business Insider: THE TECH 'TITANIC': How red-hot startup Fab raised $330 million and then went bust

DEAR SILICON VALLEY: Here’s your wake-up call… - this is a piece on Silicon Valley getting into the car business by Henry Blodget, Business Insider online news founder. Blodget became famous in late 1998 for his prediction that Amazon's shares would hit $400. They had closed at $242 the previous day and in three weeks the target was met. Jeff Bezos, Amazon founder, is an investor in Business Insider.

Bill Gurley says in his FT piece:

I heard about a fund manager who was recently 'invited' to invest in one of these many recent late stage private financings. An exclusive invitation has a solicitous feel, but it should arouse scepticism, especially if the party is crowded. As Warren Buffett said: 'There is a fool in every market and if you don’t know who it is, it is probably you.'"

The FT's Ravi Mattu and Murad Ahmed discuss the big technology stories of the week – after Uber, Snapchat and Pinterest were all linked with fundraising efforts, and Barack Obama attacked Europe over technology protectionism.

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