First, they’re acquiring users at an unprecedented clip. Second, they’re seeing valuations rise faster and higher than ever before.
That supercharged growth is changing the risk-reward dynamic for VCs, doling out enormous return multiples for savvy (and lucky) early investors and forcing later-stage investors to buy in at the kinds of valuations formerly reserved for portfolio company exits.
To illustrate just how many startups are generating tremendous valuations with private investors, Venture Capital Journal produced a list of those that have seen the biggest and fastest jump in valuation from initial to follow-on rounds in the past four years.
The list, based on a mix of publicly disclosed data, media reports and research firm estimates, is topped by some well-known names, including Box, mobile-enabled car service Uber, and self-deleting messaging app Snapchat. Dominant sectors include consumer Internet, cloud computing and enterprise software.
While rapidly escalating valuations may be a cause of concern for much of the venture industry, there’s one group that’s not worried. Early stage investors with one or more runaway hits are feeling pretty content. A single lofty outcome can return all of limited partners’ invested capital, and then some. Moreover, there’s plenty of evidence that well-chosen early stage portfolios can churn out multiple monster returns.
“The structural forces and trends really favor our model of venture investment,” said David Blumberg of Blumberg Capital, a San Francisco-based early stage firm that scored a 52x return in August from a partial sale of its stake in Hootsuite, a provider of software for tracking social media campaigns.
One trend helping early stage VCs is the lower capital requirements for Internet and software startups. Vancouver-based Hootsuite, for instance, raised less than $3 million in a seed round that Blumberg co-led in 2010, in which the firm invested less than $1 million. The company required relatively little capital to scale, as it attracted users with a free application and made money selling premium versions. That approach kept marketing costs down, as Hootsuite managed to amass millions of users without a traditional late-stage round.
Although the company sold a significant stake in a $165 million August financing (led by Insight Venture Partners), that was principally a secondary transaction to cash out existing investors and management rather than fund company operations, Blumberg said.
Hootsuite isn’t an outlier in terms of growth, either. Blumberg said his firm has other ultra high-growth companies in its portfolio, including Nutanix, a virtual computing platform provider, and Credorax, an online payment processor. Blumberg said that for Fund III, which has held a partial close, at least two out of 10 companies have had 4x markups in valuation within four to eight months of the firm’s investment.
This story first appeared in Reuters Venture Capital Journal. Subscribers can read the original story here. A related story on how Silicon Valley has the most hyper-growth startups can be read here. To subscribe to VCJ, please email Greg.Winterton@ThomsonReuters.com.
Photo: Yahoo CEO Marissa Mayer and Tumblr founder and CEO David Karp are seen being photographed after a news conference in New York in May 2013. Yahoo bought the blogging service Tumblr for $1.1 billion in cash, which demonstrates that early investments in Internet startups with business models based on freemium services can post exemplary returns. Photo by Adrees Latif, Reuters