HOPIN, a virtual events startup in London, had seven employees and was valued at US$38 million at the beginning of the year. Johnny Boufarhat, the company’s chief executive, wasn’t planning on raising more money.
But as the pandemic spread and more people held virtual events, Hopin’s business took off. Unsolicited offers from investors started pouring in. “It’s like a drumbeat,” Mr Boufarhat said. “That’s become the new way for investors to tempt founders.”
In June, Hopin raised a fresh US$40 million from venture capital firms such as Accel and IVP. Last month, without even building a formal presentation, the company garnered a further US$125 million, valuing it at US$2.1 billion – a 77-fold increase from a year ago.
And still, Mr Boufarhat said: “Investors are reaching out almost daily.” At the onset of the pandemic, warnings of startup doom abounded. Those largely faded after the initial shock of the coronavirus wore off. Now, as the new reality of remote work, school, shopping and socialising supercharges the adoption of tech products and services, sentiment has flipped even further – to a frenzy of deal-making.
Startups like Discord and Robinhood are raising more money at sky-high valuations and then getting inundated with new funding offers. Venture capitalists are fighting to get into deals. And as delivery service DoorDash and home rental startup Airbnb went public last week, the bonanza of initial public offerings is likely to enrich and fuel Silicon Valley’s startup boom even more.
“Almost every hot company right now is being pursued like mad,” said Matt Murphy, an investor at venture capital firm Menlo Ventures. “More than ever, there is this flight to being in the assets at any price.”
The boom is not just being driven by higher demand for digital products and services. Low interest rates are pushing investors to seek returns in ever-riskier assets. Venture firms have raised record levels of capital. A soaring stock market has enabled more IPOs. Big tech companies are making bold acquisitions. Even Bitcoin has reached a new high.
That helped startups amass US$36.5 billion in funding in the third quarter, up 30 per cent from a year earlier, according to CB Insights, which tracks private financing. Startups have raised 223 “mega-rounds” of US$100 million or higher so far this year, on pace to surpass last year’s total, according to Pitchbook.
Spike in valuations
The average valuations for more mature startups also spiked to a high of US$584 million, according to Pitchbook. And 81 IPOs raised US$28.5 billion in the third quarter, the busiest period for listings since 2000, according to Renaissance Capital.
“I haven’t seen anything like this in over 20 years,” said Eric Paley, an investor at venture firm Founder Collective. “The party is as loud, and the drinks are flowing as freely as the dot-com boom, despite that we’re all drinking at home and alone.”
While some startups have retrenched in the pandemic, far more have found themselves on the right side of the economy’s “feast or famine” split. With the coronavirus compressing years of tech adoption into a few months, lesser-known software companies focused on areas like cloud computing, financial technology and collaboration tools have thrived.
The world underestimated just how big the already-huge tech industry could become, said Roseanne Wincek, an investor at Renegade Partners. “More and more people are waking up to that,” she said.
DoorDash shares opened at US$182 on the New York Stock Exchange, significantly above the initial public offering (IPO) price of US$102 apiece. They rose as much as 92 per cent to touch a high of US$195.50 in trading right after the debut. The company had raised US$3.37 billion in its IPO on Tuesday. The listing may help redeem SoftBank, the swashbuckling mega-fund that was humbled last year by a spate of bad investments in startups such as real estate company WeWork.
San Francisco-based Airbnb’s shares opened at US$146 apiece, well above the US$68 initial public offering price, propelling the firm to a US$100 billion-plus valuation.
Private startups normally raise funding every 12-18 months, but with investors furiously competing to give them money, that timeline has now shrunk to three to six months, entrepreneurs and investors said. Some startups are even closing back-to-back rounds of funding at higher valuations.
After Discord, a social media platform, raised money in June valuing it at US$3.5 billion, investors immediately called to give the company more funding, said one person with knowledge of the company. Now Discord is in talks to raise more and to double its valuation to US$7 billion, said two people with knowledge of the talks, who were not authorised to speak publicly. Discord declined to comment. TechCrunch first reported on its new funding.
Instacart, a grocery delivery company, also raised two blockbuster rounds of funding this year, more than doubling its valuation to US$17.7 billion.
Robinhood, the stock trading app, has pulled in US$1.25 billion in four different funding rounds this year, valuing it at US$11.7 billion.
In a pandemic, investors have found it difficult to impress entrepreneurs with posh dinners or celebrity-laden parties. But they have gained an edge by moving the fastest.
Rahul Vohra, an entrepreneur who also backs young startups, frequently hears a company’s pitch, conducts diligence, signs a deal and wires the money all in the same day, he said.
“There’s no point in sitting on the deal,” Mr Vohra said. Waiting a week means the deal could get more expensive or become overcrowded with other investors, costing him a chance to invest, he added.
Speed is of the essence
In late summer, Addition, an investment fund, approached Snyk, a security software startup, about taking more money. Within 48 hours of meeting, Snyk signed a funding agreement. The funding, raised just eight months after Snyk’s last round, valued the company at US$2.6 billion, or 80 times its annual recurring revenue of roughly US$30 million.
“They used speed to their advantage,” said Peter McKay, Snyk’s chief executive. “Investors who are waiting for someone to raise a round – that’s almost too late.”
Henrique Dubugras, chief executive of Brex, a startup that provides credit cards to other startups, said he had also had more unsolicited calls from investors. Early in the pandemic, Brex laid off 62 employees and closed a restaurant it operated in San Francisco’s South Park. But in June, business started rebounding, he said. Calls from venture capitalists soon followed.
“I’ve honestly never seen it as aggressive as it is right now,” Mr Dubugras said. He said Brex was not currently planning to raise more funding.
The froth has created a sense of unease among some investors. Mr Paley said some of Founder Collective’s portfolio companies had raised “breathtaking” financing rounds that felt risky.
“When people congratulate us, we are sheepish about whether these nosebleed valuations are good for us or the founders,” he said.
But there’s little point in declaring the sky is falling, other investors said. Who would listen? For more than a decade, prominent investors have tried to warn against startup spending, valuations and bubbles. In that time, the tech industry has only gotten bigger, richer and more powerful.
Some investors pointed to Sequoia Capital, one of Silicon Valley’s best-known venture firms, which sent a dramatic “Black Swan” memo in March telling companies to prepare for a difficult year. Six months later, Roelof Botha, a Sequoia partner, said at a virtual TechCrunch conference that he hadn’t anticipated how much this era would benefit tech companies. Sequoia declined to comment.
That same week, three Sequoia-backed startups held lucrative IPOs. The firm will most likely see new windfalls this week because of its investments in DoorDash and Airbnb. Sequoia also owns shares in Zoom, the videoconferencing company that has gone from a US$1 billion valuation to US$116 billion in less than two years. NYTIMES