Huge VC investments into Uber, Airbnb stifle competition

The jackpot-sized venture capital investments last year reveal a few things about Silicon Valley's tech scene: Uber's IPO seems imminent, investors are convinced Airbnb can't be beaten by a competitor, and unlike years' past, it's now pretty common for a company to nab two huge investments within just a few months.

There's a whole lot of money going around, and if your name is Lyft or Instacart, investors are piling on the dough without hesitation.

Last year, there were 22 venture capital investments in Silicon Valley of $120 million or more - nearly half of all the so-called mega deals, or tech investments that top $100 million, in the entire country for 2014, according to the MoneyTree Report, produced by PricewaterhouseCoopers and the National Venture Capital Association. And only in Silicon Valley did funding rounds top $1 billion last year, according to the report, which uses Thomson Reuters data.

As investment rounds balloon in Silicon Valley, VCs are able to handpick the winners, filling the war chests of their favorite startups with so much cash that the competition stands little chance of catching up. The top 10 deals last year accounted for about one-fifth of the total investments in the valley last year.

"People really pile into the winner, they really lean in, and they invest very heavily," said Anand Sanwal, co-founder and chief executive of CB Insights.

Uber, for instance, raised an unprecedented $2.4 billion in two separate rounds; Lyft raised $250 million, a respectable sum, but just about one-tenth of Uber's arsenal.

"It's a vote of confidence in both the technology and the team at Uber," said John S. Taylor, head of research for the National Venture Capital Association.

The record-breaking rounds last year not only offer insight into the startups and sectors VCs are jazzed about, but they also position several Silicon Valley firms for massive growth this year. Companies such as Pure Storage, a Mountain View-based business that sells hardware and software for storing data, and Cloudera, a software company for data processing that has offices in Palo Alto and San Francisco, raised so much money last year they are ready to open offices across the globe, perfect their products, and acquire companies that pose a threat.

They also won't have to worry about money for a long, long time.

"We raised a large amount of cash that will sustain us forever," said Jim Frankola, chief financial officer of Cloudera, which last year raised $530 million, nearly four times the total amount it had raised since its 2008 founding.

Six of the top 10 VC investments in the valley went to ride-hailing services Uber and Lyft, online house- and apartment-renting service Airbnb, and grocery-delivery upstart Instacart - with Uber and Airbnb each claiming two separate deals. This collection of companies falls under a single category known as marketplaces - apps or websites that connect a person selling an item or service with a consumer who wants to use that item or service.

The surge of investments into this sector last year - $3.5 billion for those four companies - underscores just how excited venture capitalists are about these types of apps. They are fairly inexpensive companies to run - Airbnb, for instance, doesn't have to build and maintain hotels, or pay hotel staff, said Neil Sequeira, managing director of VC firm General Catalyst Partners in Palo Alto. And they are easy to grow quickly, because they don't need a physical office in every country - just consumers with a smartphone.

"The reason they make better investment is they are very high-margin at scale," he said. "You're basically just closing a transaction. You don't get that dirty."

Other companies that got investors' attention: Pinterest, an app for sharing and curating ideas and projects, raised $200 million; and Palo Alto-based Houzz, a website to help home-owners remodel and design their house, added $165 million to its coffers last year.

"Houzz is going after a market that is almost half a trillion dollars every year just in the U.S., and probably twice that internationally," said Hany Nada, a managing partner with GGV Capital, a Houzz investor.

VC firms also bet big on companies selling data storage and management. Pure Storage raised $225 million last year, nearly double all its previous funding; Box, a Los Altos company that went public last month, raised $158 million; and Dropbox, in San Francisco, raised $325 million.

Such large investments can put companies far ahead of the competition by making them into global empires. Uber and Airbnb will use the money to expand internationally, becoming ubiquitous brands that are popular from Boston to London and Tel Aviv. Pinterest too plans to add users in new countries - it currently operates in 31 - as well add more features to its site and build up its advertising business to make more money, according to co-founder and chief executive Ben Silbermann.

And for some companies, big fundraising deals mean an IPO is looming. Analysts say Uber will likely go public this year, as will Airbnb and Palantir, a data analytics company backed by Peter Thiel that closed a $500 million investment last year. And Pure Storage's newfound wealth will help CEO Scott Dietzen "practice" running the company is if it were public, he said.

"We don't have any committed timeline for a going-public event for sure, but we are practicing for going in that direction," he said.

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