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Fears Percolate as Billion-Dollar Private Company Valuations Climb

Xconomy National — 

There are 73 private companies in the world with valuations of more than $1 billion, up from 40 just one year ago, according to a report published by The Wall Street Journal yesterday.

Some of those 40 companies are no longer on the list. Beats, valued in February 2014 at $1.1 billion, was sold to Apple for $3 billion, earning Dr. Dre and early investor LeBron James hefty paychecks. The company with the highest valuation at the time, Chinese e-commerce business JD.com valued at $11.7 billion, had a $1.78 billion IPO in May. Fortune’s Dan Primack has tried to poke holes in the list, too, noting companies such as Lazada and SurveyMonkey were left off.

Two private companies today are valued at more than $40 billion—Chinese smartphone maker Xiaomi and private car service Uber. Eight companies are now valued at more than $10 billion, up from only three last year. And those valuations are growing.

Uber added $1 billion to its Series E financing round, bringing the total amount raised in the round to $2.8 billion, according to The New York Times. As Uber announced it was raising funding, bringing its total to more than $5 billion of private financing, more and more investors clamored to join, the paper reported.

Other private operators, such as Pinterest, are making similarly dramatic moves. The company is in talks to raise $500 million, propelling its valuation to above $11 billion, according to the Journal. That would make it the ninth private company in the world with an estimated value of $10 billion or more.

Snapchat is seeking to raise $500 million itself, according to Bloomberg. That would place the social media app’s value at as much as $19 billion.

Part of the value venture capitalists see in these companies is more than what we see right now, which is why the dramatic numbers can seem extreme. Each is seeking some method of expanding the services it offers, such as Uber’s plan to offer a car pooling feature that lets strangers share rides to the same location. And Pinterest is seeking to expand beyond scrapbooking, potentially becoming a place where people pinpoint things they intend to buy.

Venture capitalists are often looking for tech businesses that can turn the single product that it starts with into an entire platform—to use an unfortunately wonky term. A platform not only attracts a wider audience, it better engages an audience. And engagement is the clear path to monetization.

Still, the flush of cash has plenty of people talking about a bubble.

Bill Gurley, a partner at Benchmark, flat out said, “Stop cramming money into private companies,” at the Goldman Sachs Technology and Internet conference last week, according to a report in Forbes. He said valuations aren’t being rigorously evaluated, and companies aren’t going through proper audit processes, the report said.

Meanwhile, Henry Blodget published some 1,500 words this morning on how the current environment compares to the late ‘90s. (There was also a lengthy section on how he won a Twitter debate with a “Valley BigWig”.) His takeaway? “The alarm bells are now ringing,” he wrote.

At the Goldman conference, Gurley called the action of startups inviting investors to participate in private offerings “Madoff-esque,” according to Forbes, adding that “This is a party where everyone has been invited. It’s just not that hard to get access.”

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  • SFBurke

    I am not sure why anyone would care what Blodgett has to say. He is primarily famous for lying to the public in order to make money for his investment bank employers and is permanently barred from the securities industry as a result.. Why should anything he says now have any credibility?