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Tech Investors Create a Billion-Dollar-Baby Boom

Snapchat, the messaging app popular with teenagers, is in the market for more money.Credit...Kc Alfred/Reuters

What a difference a year makes.

Less than 12 months after investors valued Snapchat, the red-hot messaging app, at about $10 billion, the start-up is again in the market for money — and poised to nearly double that valuation.

A range of other popular start-ups are also poised to propel their net worths to similar multibillion-dollar heights, including the virtual scrapbooking service Pinterest and the ride-hailing app Lyft. Uber, Lyft’s top competitor, has raised more than $3 billion in the last year and now has an eye-popping valuation of $40 billion.

Giant sums of money and sky-high valuations are nothing new in the technology industry. But the latest burst of activity has put on clear display the frenzied pace of investors, who are eager to catch the next blockbuster company like Facebook. The action is also again spurring talk that overeager investors are poised to relive the dot-com boom and bust at the turn of the century, when overinflated start-ups led to a quick and painful downturn.

For investors, the hunt is for the next so-called unicorn, a nascent business worth $1 billion or more — on paper, at least.

Just last year, 38 privately held companies backed by venture capital joined the billion-dollar club, putting the membership of that group at 54, according to the data firm CB Insights. Digi-Capital, a mobile Internet advisory firm, estimates that the total value of mobile Internet start-ups worth $1 billion or more increased $28 billion in just the last quarter of 2014.

“The grand experiment that we are running right now is, Can you cram hundreds of millions of dollars into 80 or 90 different private companies and have it end up well?” said Bill Gurley, a partner at the venture capital firm Benchmark who is also an investor in and one of the most vocal proponents of Uber.

He added: “For some, I think it will end badly.”

Billion-dollar companies were once considered rare. But they are quickly becoming more commonplace. Case in point: Slack, the workplace collaboration start-up, hit the billion-dollar valuation mark just eight months after introducing its service. And at $46 billion, Xiaomi, the Chinese smartphone giant that started just five years ago, is the most richly valued private tech company in the world.

Even in recent years, some of the highfliers have landed hard. Fab, an online retailer once valued at close to $1 billion, is now reportedly close to being sold for less than $20 million.

Yet the stories of failure have not dented investor appetite for the brightest stars in the start-up firmament. Pinterest, the social bookmarking site, is in talks to raise $500 million at a valuation of more than $10 billion, according to a person with knowledge of the discussions.

Snapchat, too, is considering raising $500 million at a valuation of up to $19 billion, according to a person briefed on those talks. Though the company, best known for teenagers flocking to its disappearing messages, has been collecting revenue from advertising for less than a month, the promise of its business has excited many in the tech and media industries.

“I know it’s an ephemeral platform, but my 14-year-old spends half her life there,” Jeremy Zimmer, the head of the United Talent Agency, said at an industry conference, Code Media, this week.

The size of investments has clearly picked up. About $48.3 billion was invested in 2014, up 61 percent from the same time the previous year, according to a report by the National Venture Capital Association and PricewaterhouseCoopers. But that money went into 4,356 deals, up only 4 percent, suggesting that more of that capital is going into fewer — and bigger — rounds.

Investors have been eager to raise even more money to pour into start-ups. Dedicated venture capital firms raised nearly $30 billion last year, a level untouched since 2007, according to Thomson Reuters.

Much of the money that has helped inflate the latest rounds of financing has come from mutual fund giants like BlackRock, Fidelity and T. Rowe Price, known for years for buying shares in start-ups once they go public. But lately the mutual fund companies have been big investors in start-ups like Uber, looking to tap into phenomenal growth.

Executives at these mutual funds say that they had long sought to move into the world of venture capital. But they really gained access in recent years as the size of the investments in start-ups grew into the tens of millions of dollars or more — enough to meaningfully affect their investment returns.

Part of what drives the bigger investments, investors say, is the advent of today’s technology — high-speed Internet connections, the ubiquity of smartphones, modern social networks — that has made it possible for start-ups to become nearly overnight sensations, moving much faster than they would have 15 years ago.

Now, with millions of people using their products and a fertile investment environment, these start-ups are willing to stay private for much longer than they may have years ago.

“It used to be if you wanted to raise the ultimate round of capital, it was only available on the public markets,” said Mark Suster, a partner at Upfront Ventures. “But because these companies are becoming so big, they don’t need to go public quickly, and they’re raising capital in the private markets that they would have in the public markets.”

Many of these investors, according to those on Wall Street and in Silicon Valley, are willing to invest at huge valuations because they plan to sell their shares soon after start-ups go public.

But not all participants in the latest mega-rounds want to cash out quickly. Some, like Henry Ellenbogen, are into these companies for the long haul.

Mr. Ellenbogen, the head of the New Horizons fund at T. Rowe Price and an investor in Twitter before it went public, put it best in his letter to investors late last year: “We prefer private companies that we would want to own more of on the I.P.O., not less.”

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Investors Create a Billion-Dollar-Baby Boom. Order Reprints | Today’s Paper | Subscribe

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