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Uber Funding Talks Highlight the Speedy Pace of Investments

Uber raised a total of more than $2 billion from investors in June and December last year — and is now back for another round. The anonymous messaging start-up Yik Yak collected $73.5 million in three financing rounds in seven months, and Zenefits, a human resources start-up, raised more than $580 million in less than two years, with the latest deal done last week.

The pace of technological change has long been happening at the lightning-fast speed of the Internet. Now, start-up financing is increasingly taking place at that speed as well.

Read MoreUber's valuation may top $50B with new funding: WSJ

Uber is just one example of the quickening tempo. The ride-hailing company is in discussions to raise around $1.5 billion in financing, which could value it at $50 billion. Just five months ago the company collected$1.2 billion for its war chest, an amount that later swelled with the addition of a strategic investor.

And the rate of fund-raising by Uber — and across the start-up landscape — has little precedent, driven by money pouring in from hedge funds, strategic investors and more, and by the willingness of entrepreneurs to embrace the cash.

A Uber driver in New York City.
Scott Mlyn | CNBC
A Uber driver in New York City.

"When capital markets are this loose, people tap them, whether it's right to or not," said Mark Suster, a partner at the venture capital firm Upfront Ventures. "Companies are raising rapid rounds of capital for only one reason: They can."

The frequency of the fund-raising by many start-ups — now multiple rounds in months rather than years — is "otherwise unheard-of," said Anand Sanwal, chief executive of CB Insights, a research firm that studies venture capital.

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The shrinking time between funding rounds shows how Silicon Valley's current boom is not just about start-ups reaching a high valuation but also about how fast they can pull that off. The tempo is in marked contrast to the pace of start-up fund-raising last decade, when many companies would typically leave a year or two between financing rounds. When LinkedIn, the professional social networking company, raised money as a start-up in the mid-2000s, it took more than three years for its first three rounds of financing.

Since the beginning of 2013, however, more than 20 tech start-ups have held three rounds of funding within a year and a half, according to CB Insights, which called the group the "18-month sprint" companies. Last year, nearly 500 tech start-ups did financing rounds less than one year apart, CB Insights estimated, more than any other year since at least 2011.

Among the companies that completed numerous financings in tight time frames was the fitness membership start-up ClassPass, which completed three rounds in nine and a half months, CB Insights said. Slack, the collaboration software start-up, last month took in $160 million; just six months earlier, it had received $120 million from investors. Snapchat in December raised nearly half a billion dollars from a bevy of financiers. Just three months later, the Chinese e-commerce company Alibaba poured $200 million into the messaging start-up.

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Spurring the more frequent fund-raising is the desire of investors — including hedge funds, mutual funds and strategic investors — to put up money more often for fear of missing out on the next big thing. One reason Uber is in talks to raise money again just a few months after a prior round is because of an overwhelming amount of investor interest, said a person with knowledge of the company who spoke on the condition of anonymity because the process is confidential.

Uber did not immediately respond to a request for comment.

Many institutional funds and international companies have leapt into start-up investing as the number of initial public offerings has slowed, prompting investors to wade into private companies to find growth, according to Mark A. Siegel, managing director at the venture capital firm Menlo Ventures, which has invested in Uber.

"I don't blame entrepreneurs," Mr. Siegel said. "This is something where investors are absolutely complicit in this, and in some ways are driving this."

He added that the phenomenon of fast fund-raising appears largely limited to the club of "unicorns," or the elite companies that are worth at least $1 billion. Investments in the later financing rounds for companies jumped to $4.2 billion in the first quarter, up 50 percent from a year ago, according to data from the National Venture Capital Association, making it the biggest quarter for such investments since late 2000.

Entrepreneurs are often happy to take up eager investors on their offers. Stewart Butterfield, chief executive of Slack, recently said that his start-up had more than enough money in the bank — just before collecting $160 million more.

"This is the best time to raise money ever," he said last month. "It might be the best time for any kind of business, in any industry, to raise money for all of history, like since the time of the ancient Egyptians."

Mr. Butterfield said Slack had "no immediate use" for the new money it had just raised. Still, the capital "reinforces the perception for our larger customers that we'll be around for the long haul," he said.

Parker Conrad, chief executive of Zenefits, said rapid-fire fund-raising is necessary to quickly build up a company so it is large enough to take on competitors. With the money, Zenefits has been able to persuade more than 10,000 small and midsize businesses to use its service.

"We want to grow really big, really fast," Mr. Conrad said in an interview last week for the company's third round of fund-raising since early 2014. "That requires a lot of capital."

Even if the numerous rounds of new cash are not put to immediate use, the money may come in handy one day if — or when — the free-flowing capital faucets are shut off. Investors like Bill Gurley, a partner at the venture capital firm Benchmark, have warned of an eventual reckoning, a time when money is not as easy to come by, which will cause some companies to sputter out when their bank accounts empty.

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It is to protect against this inflection point that some companies may be raising as frequently as they can, while they can, said Mr. Suster of Upfront Ventures.

"Some companies view these as war chests being raised to weather the inevitable corrections," he said. "For now, the tide is high and nobody knows who's naked."