Hedge funds and mutual funds are flocking to the market’s hottest corner, paying 15 to 18 times projected sales in private-funding rounds » , fuelling talks of dot-com like crash.
A flood of money from unconventional sources has sent valuations of late-stage technology startups, including Uber Technologies Inc. and Snapchat Inc., to levels that haven’t been seen since before the dot-com crash.
Hedge funds and mutual funds that once shunned venture- style deals are flocking to the market’s hottest corner, paying 15 to 18 times projected sales for the year ahead in recent private-funding rounds, according to three people with knowledge of the matter. That compares with 10 to 12 times five years ago for the priciest companies, one said.
While some of the startups may become profitable, others are consuming cash and could fail. The torrid action is spurring talk that 15 years after the collapse of the Internet bubble, the market may be setting itself up for another bruising fall.
“Some of the valuations are mindboggling,” said Sven Weber, investment manager » of the Menlo Park, California-based SharesPost 100 Fund, which backs late-stage tech startups. Companies now valued at 16 times future revenue could easily lose a third of their value in a market pullback that Weber and others say may occur in three years. The other people asked not to be named because they didn’t want to be seen criticizing competitors’ deals.
Such worries have done little to cool the market. Investors’ appetites have been stoked by jackpots won in initial public offerings. Among the biggest: an almost fourfold $3.2 billion paper profit earned by Silver Lake Management LLC in Chinese e-commerce giant Alibaba Group Holding Ltd.’s record- breaking, $21.8 billion September IPO. It was a quick kill for Silver Lake, coming three years after the private-equity firm’s investment in the company.
Private values also are soaring. Online scrapbooking startup » Pinterest Inc. raised $367 million this month, valuing the company at $11 billion. Snapchat, the mobile application for sending disappearing photos, is valued at $15 billion, based on a planned investment by Alibaba, according to people with knowledge of the deal. Uber’s valuation climbed more than 10- fold since the middle of 2013, reaching $40 billion in December.
Mutual funds and hedge funds have elbowed into late rounds to boost returns and ensure they can buy blocks of shares in IPOs as competition for tech offerings intensifies. Fidelity Investments, T Rowe Price and Wellington Management and hedge funds Coatue Management and Tiger Global Management took part in at least 37 pre-IPO funding rounds totaling $5.55 billion from 2012 to 2014.
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