Market News: Does Bigger Mean Better in Silicon Valley?

Posted On August 20, 2018 2:14 pm

We know the tendency for all things to get bigger over time. The latest market news has been all about “mega,” the new term being applied everything from movies to investments.

Just as the remake of Jaws has inflated the great white shark to a Mega, we also see an increased fascination and marketing with mega-deals and mega cap companies.

But is bigger always better?

Many argue the focus on largest companies, let’s call them FANG, has done a disservice to investors. According to this argument, we’re lead to ignore smaller companies that are still in the early, but accelerating, growth phase of their business.  Without outside investment dollars, they may never reach their potential to become a “Mega.”

This forces start-ups to stay private longer, barring the all but the best-connected private equity, venture capital or hedge fund interests from participating in the hockey stick growth and massive returns that come with early investments.

To make matters worse, private companies are now racing to become Mega before they even consider an initial public offering.  This means valuations are getting over-inflated, leaving little room for later stage investors to reap a profit.

The New York Times had a recent piece on how the Mega Rounds are taking over Silicon Valley, creating a potential bubble in privately held tech companies.

You can read the article here:

Start-ups raising $100 million or more from investors — known as a mega-round in Silicon Valley — used to be a rarity. But now, they are practically routine, producing a frenzy around tech companies with enough scale and momentum to absorb a large check.

“If your competitor is going to raise $150 million and you want to be conservative and only raise $20 million, you’re going to get run over,” said Bill Gurley, a managing partner at Benchmark Capital.

Investors participated in a record 273 mega-rounds last year, according to the data provider Crunchbase. This year is on pace to easily eclipse that, with 268 completed in the first seven months of the year. In July, start-ups reached more than 50 financing deals worth a combined $15 billion, a new monthly high.

In the last 10 days, Letgo, an online classifieds ads company, raised $500 million. Actifio, a data storage company, took in $100 million. MyDreamPlus, a co-working space start-up, secured $120 million. And Klook, a travel activity booking site, got $200 million.

These mega-rounds have become so common that CB Insights, which tracks start-up investments, has even debated lifting its definition of a mega-round to $200 million or more, according to Anand Sanwal, the firm’s chief executive.

Many of the new investors, including SoftBank’s $93 billion Vision Fund, manage funds so large they dwarf the entire traditional venture capital market in the United States. These giant funds are looking for start-ups that can take large sums of money with one shot. Writing lots of small checks is too time-consuming, and the returns from small bets will not make a difference for a such a big fund. So investors are competing to back any start-up that shows promise and the ability to put $100 million or more to use.

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