SAN FRANCISCO – The age of the startup megadeal is dawning.
Private-equity firms, hedge funds and mutual funds are pouring money into Silicon Valley at an unprecedented rate, with BlackRock the latest entrant. The firm that manages $4.3 trillion is leading a $100 million investment in database software maker Hortonworks, just two months after a bigger deal for Dropbox.
Nine-figure financing rounds have long been reserved for high-profile initial public offerings, though a sea change is now under way. Technology companies are delaying share sales until they can more confidently tell their growth story to Wall Street, pushing investors that have historically bought into IPOs to get in earlier while the startups remain closely held.
There’s a ton of money out there that wants to invest aggressively in this space, Rob Bearden, chief executive officer of Palo Alto, Calif.-based Hortonworks, said in an interview. We had a very difficult time not taking more than we did.
Hortonworks becomes the fifth company to garner at least $100 million in the past two weeks, following Actifio last week and even bigger investments also in March in Cloudera and TangoMec. Room-sharing service Airbnb is said to be pulling in about $450 million, more than what any U.S. technology company except Twitter raised in an IPO last year.
There have been 11 nine-figure funding rounds total in technology companies so far this year, according to data compiled by Bloomberg. It took until August last year to reach the same number of $100 million-plus financings.
The megarounds are refueling the bubble debate in Silicon Valley as skeptics of the boom question whether so many unproven businesses can live up to the hype. Adding ammunition is the most vibrant IPO market since 2007, as well as Facebook Inc.’s agreement last month to pay $19 billion for texting service WhatsApp Inc., the biggest Internet deal since the disastrous AOL-Time Warner merger in 2001.
There’s all this hedge fund and mutual fund money out there, said Anand Sanwal, CEO of CB Insights, a New York research firm that tracks venture investing. For those with resources, if they think this might be the next big thing, why not get in now?
Megadeals in 2013 went to 16 companies, including Palantir Technologies and Pinterest. The biggest year was 2011, when 17 companies including Facebook, Groupon and Zynga raised nine-digit sums, according to data compiled by Bloomberg.
Other companies to raise at least $100 million this year include online retailer Wayfair and business software maker Domo. Both deals included financing from T. Rowe Price Group, which also backed Cloudera, MongoDB and Pure Storage in $100 million-plus deals. Dropbox filed last month to raise as much as $450 million in a round that includes BlackRock.
The flood of money into startups is pushing some acquirers to offer even huger sums. Nest Labs, the maker of digital thermostats, was looking to raise a big round before Google agreed to acquire it in January for $3.2 billion. Todd Chaffee, a partner at Institutional Venture Partners, said his Menlo Park, Calif.-based firm, which backs later-stage companies, was competing with big investment firms to finance Nest at a valuation of more than $2 billion.
We’re definitely seeing the hedge funds and big private-equity firms coming down market a little bit, said Chaffee, who invested in Twitter, HomeAway and RetailMeNot.
Venture capital firms that manage funds ranging from $500 million to $1 billion are ceding late-stage financings to giant global institutions and public companies. Most of IVP’s deals are in startups valued at $100 million to $300 million, so for the bigger investments Chaffee said a lot of our companies raise capital from those firms.
Within megadeals, the Hortonworks investment, which values the company at more than $1 billion, underscores the growth of big data and an open source software for cloud computing called Hadoop. Hortonworks, spun out of Yahoo in 2011, and Cloudera, whose co-founders were at Yahoo and Facebook, are vying to sell commercialized Hadoop services to businesses that need to analyze and track vast amounts of data.
Hortonworks CEO Bearden said the company could have raised twice as much money and opted to stick with $100 million, including financing from Passport Capital, because its software model doesn’t require hefty expenditures.
The company plans to bolster its staff by 40 percent this year to about 420 employees, he said.
We could’ve literally raised money from 20 different places, Bearden said.
MongoDB, which raised $150 million in October, is another competitor in the big data market promoting a database technology called NoSQL.
The influx of cash in technology is largely the result of the low interest-rate environment, Bill Gurley, a partner at venture firm Benchmark, said in a March 12 interview on Bloomberg West. Yields on 10-year Treasuries have hovered below 3 percent since 2011.
There’s a lot of capital searching for a home, said Gurley, whose firm is an investor in billion-dollar companies including Hortonworks, messaging app Snapchat, car-sharing service Uber and Dropbox. We see it most acutely in the venture world in the late-stage market.
With bigger rounds come higher valuations. In a December report, CB Insights said 26 private U.S. companies have raised capital at valuations of $1 billion or more in recent years. Yet from 2004 through 2013, there were only 45 $1 billion exits total, meaning it’s likely that at least some of the recent investments will lose money, Sanwal said.
Private market valuations also tend to track rallies in public stocks, and with the Standard & Poor’s 500 Index trading near a record, technology investors are betting that a five-year bull market is poised to keep going.
Internet companies in the U.S. attracted $7.14 billion of venture funding last year, the most since 2001, and software makers reeled in $11 billion, the biggest year since 2000, according to the National Venture Capital Association.
Along with T. Rowe Price, Google and Intel are among the big technology backers, as is Tiger Global Management, the New York-based firm that bet on LinkedIn and Facebook before the social networks went public.
Sanwal said that all these well-capitalized entrants into the venture business are making it harder for traditional late-stage firms to get deals, because global investment firms and public companies are less price sensitive.
Technology Crossover Ventures, a growth-stage firm, raised $2.23 billion last week for its eighth fund. Jake Reynolds, a general partner at the Palo Alto-based firm, said TCV’s 20 years of experience is its competitive advantage over deep-pocketed challengers.
There has always been fierce competition from a variety of sources - many of whom have entered and exited the market numerous times, Reynolds wrote in an e-mail. The technology markets are complex enough where domain expertise is essential to identify trends and companies before others recognize their potential.