The secret to how startups like Uber raise billions: Saudi Arabia, China and Singapore

The secret to how startups like Uber raise billions: Saudi Arabia, China and Singapore

Money_rain

Image: Getty images/Jose Luis Pelaez Inc

 

Just when you thought the startup market can’t possibly get any crazier, Uber goes and raises another $3.5 billion in funding.

That jaw-dropping amount of money, the single largest round of funding ever raised by a private U.S. company, highlights both the insatiable appetite certain startups have for capital and the little-discussed way they get that money.

Uber’s $3.5 billion in funding didn’t come from the usual collection of venture capital firms, technology giants or even the mutual funds who have been flooding the market with cash. Instead, all of that Uber money came from one source: Saudi Arabia’s sovereign wealth fund.

The fund is just one of many government-owned investment vehicles around the world with access to hundreds of billions in capital that are pumping small but meaningful portions of that money into technology startups.

Singapore’s sovereign wealth fund has backed billion-dollar tech companies like Square, Xiaomi and FlipKart. Didi Chuxing, Uber’s chief rival in China which has raised billions and plans to raise billions more, is backed by China’s wealth fund, China Investment Corporation. Spotify, which is bleeding money while raising more, counts Abu Dhabi’s wealth fund as an investor, and Jawbone, rumored to be struggling right now, recently took money from a Kuwait fund.

So far this year, these sovereign wealth funds have made 15 investments in startups, including the most recent investment in Uber, according to data provided to Mashable by PitchBook, a venture capital database. That’s on pace to beat the 26 funding deals throughout all of 2015.

For the investment firms, these deals help diversity their portfolios beyond oil and gas, and offer the promise of injecting their respective local economies with new technological innovations. For the startups, it paves roads into new markets and provides yet another pipeline for more cash — sometimes leading to unprecedented funding rounds like Uber’s.

“A lot of these countries are trying to embrace technology and apply that to their economies,” says Michael Maduell, president of the Sovereign Wealth Fund Institute, a group that studies these public funds.

In a statement released Wednesday, the director of Saudi Arabia’s public investment fund framed the Uber investment as part of a broader commitment to “boosting employment opportunities and women’s participation in the workforce, and encouraging entrepreneurship.”

Other investments, like Singapore backing Snapchat, are likely purely opportunistic attempts to get in early on what could be the next Facebook. As Maduell puts it, “I don’t see Snapchat as a job generator in Singapore.”

The concern is that these sovereign wealth funds — along with mutual funds and other non-traditional tech investors — are further inflating the startup bubble by helping young, private companies raise more capital than many established businesses receive when going public on a stock exchange.

 

Funding-Chart-2

 

“I think we all have to recognize what we’ve seen over the last 18-24 months is a great experiment that is largely untested,” says Daniel O’Keefe, an investor with Technology Crossover Ventures. “The sheer amount of capital in illiquid markets is unprecedented.”

The large sums of money, as O’Keefe and others have pointed out, is not free. The more funding that Uber, Airbnb and Snapchat receive, the higher their valuations their soar and the more they are expected to grow their businesses in order to provide adequate returns to those investors.

 

 

 

That bet doesn’t always pay off as intended. Singapore’s investment fund reportedly backed Square at a $6 billion valuation in 2014. One year later, Square went public at half that valuation — and hasn’t improved much since.

“The jury is still out as to whether or not there is a sucker,” O’Keefe says.

 

[Mashable]

August 8, 2016 / by / in , , ,

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