Uber recently collected another $1 billion from investors; Snapchat is eyeing at a $19 billion valuation; and Pinterest is reported to be seeking more capital at a $11 billion valuation. Despite industry warnings, investors are treating these private technology start-ups as publicly listed companies. Late-stage tech companies such as these have already raised $16 billion in the first seven weeks in 2015, twice the $8.1 billion during the same period a year ago, according to PrivCo. Snapchat would become the third most valuable venture-backed company in the world if it sercures its new financing.
Because these private companies lack public disclosure, it is difficult to ascertain their high valuations. The market for them is considered the “most crowded,” according to Bill Gurley, a partner at Silicon Valley’s Benchmark Capital. He also cautions that investors being “invited” into the crowd should be a reason for skepticism rather than being viewed as special treatment. Unlike their publicly listed counterparts, these start-ups are much more focused on their revenues rather than their profitability. Kurt Simon, head of TMT investment banking at JPMorgan, noticed, “an increasing number of companies decid[ing] to stay private for longer.” This could be either because they no longer need to go public to raise capital for further growth, or it could no longer circumvent the disclosure rules.
Mutual funds are competing for stakes for their IPOs because as more private funding a company secures, there will be less offered to the public market. Although investing in them pre-IPO could provide very attractive returns, it could prove to be very risky due to the opaque financials. Nevertheless, this mentality could be causing these start-ups to become overvalued.
-- Angela Li