Silicon Valley startups have been raising more money in recent months, and they have SoftBank of Japan largely to thank.
According to a report in The Wall Street Journal, SoftBank is pouring billions of dollars into technology-focused startups, which is prompting other global investors — including U.S.-based venture capital firms — to follow suit. That has resulted in what The Wall Street Journal reported is a record level of late-stage capital coming to these companies, keeping some away from the public markets even longer. That is also resulting in worries that the Silicon Valley startup sector is getting overvalued. According to the paper, bidding wars among investors are starting to reemerge, while even foreign investors who had been more conservative are opening or expanding offices in the U.S. to court entrepreneurs. “The top companies have as much heat around them as ever and continue to get bid up,” said John Locke, who runs late-stage investing for venture capital firm Accel Partners, in the WSJ report.
Citing data from PitchBook, the paper reported that from the start of this year through the middle of March, 102 U.S. startups raised around $50 million each for a total of $16 billion. Its a record — and a departure from just two years ago, when investing slowed down as venture capitalists and foreign investors came to the conclusion that private valuations have tended to be higher than what the companies get in the public markets, resulting in less than stellar IPOs. Venture capital firms wanted companies to focus on revenue and profit instead of user growth, and investments declined. The WSJ noted the effect was most profound with mutual funds.
That has all changed in 2018 with SoftBank and its Vision Fund, which is its $92 billion investment fund focused on technology companies. The fund is backed by Saudi Arabia and Abu Dhabi and has invested more than $36 billion over the past year. At the same time, two sovereign wealth funds and some retirement funds have started investing in startups directly instead of venture funds. Meanwhile, Sequoia Capital, the U.S. venture capital fund, is raising as much as $13 billion for a new fund, which is the largest for a VC based in the U.S., noted the report. While Sequoia has kept its funds smaller in the past, it decided last year to launch a larger fund as it viewed an opportunity to invest in companies as they remained private for longer.
While the startups are liking the investments, there are concerns that it could create an environment where the startups overspend or engage in price wars, which has happened in the past. “We’re encouraging the excessive use of capital,” Bill Gurley, a partner at Benchmark, said of venture capitalists at a recent conference, reported the WSJ. “We’re all doing it because it’s the game on the field.”