Uber is driving away with investor money, taking an outsized chunk of tech funding in Silicon Valley.
The ridesharing service, which connects passengers with drivers through a smartphone app, has raised the largest financing round of any venture-backed company in Silicon Valley in four of the last seven quarters. And it’s preparing to do it again: Uber is working to raise between $1.5 billion and $2 billion in new funding, according to media reports that cited unnamed sources familiar with the plan. A round of that size would likely be larger — by a huge margin — than what any other tech firm raises this year, and would value the company at $50 billion or higher.
With its colossal funding rounds, Uber has become the leader in what experts are calling quasi-public companies — firms that have outgrown the private market but stay private because they can continue to raise money at stratospheric valuations. It’s a new breed of tech firms created by the ever-increasing speed and ever-growing sum of financing.
“The phenomenon is real — the hyper-speed of financing,” said Michael Greeley, general partner with Flare Capital Partners, a venture firm in Boston. “Companies can stay private a lot longer and raise private capital … The irony is that I don’t think (Uber) could have raised that kind of money in the public market.”
Other companies, such as social sharing site Pinterest and HR software startup Zenefits, are following Uber’s lead with ballooning funding rounds — although experts say no other company is close to catching Uber, which eats up a disproportionate amount of financing.
In the first quarter this year, Uber raised $1 billion, nearly 17 percent of the total $6 billion that venture-capital and other funds invested in Silicon Valley, according to data from the MoneyTree Report, a quarterly breakdown of investing by PricewaterhouseCoopers and the National Venture Capital Association. That followed Uber’s $1.8 billion of financing in the fourth quarter of last year, which was nearly 28 percent of the total sum — $6.3 billion — invested in the valley during that period. By comparison, the second-largest deal of that quarter — grocery-delivery service Instacart’s $210 million round — represented just 3 percent.
In the summer of 2014, Uber raised $1.2 billion, which accounted for almost 16 percent of investments in Silicon Valley firms in the second quarter, and the company’s $258 million round in the third quarter of 2013 accounted for 7 percent of the total.
“Uber is such an unusual beast,” said Greeley.
And its dominance has created, say some experts, a lopsided market where other promising startups may get overlooked while investors compete for a piece of Uber.
“A lot of investors feel they missed it on Facebook and they don’t want to make the same mistake twice,” Greeley said.
Because many of Uber’s investors are hedge funds, private-equity firms and even foreign governments, Uber isn’t sucking up all the money from traditional venture-capital firms that should go to fledgling startups. But it has spawned a “greed effect, which is that every startup now wants to be the next Uber, a private company with access to public capital,” said Aswath Damodaran, a professor of finance at the Stern School of Business at New York University.
This “greed effect” was on full display during a fund-raising tear last week, when San Francisco lending startup Affirm said it raised $275 million in debt and equity, San Francisco-based Zenefits announced it raised $500 million at a $4.5 billion valuation, and Pinterest revealed it had raised $186 million to close out a $553 million round, and would allow employees to sell a portion of their stock.
“There have been plenty of other companies raising a lot of money, at huge valuations,” said Andy White, senior research analyst with PitchBook. Uber “is simply the most extreme case of a broader trend.”