As last week came to a close, funding news involving three major U.S. technology startups lit up on Twitter.
Carta closed a $500 million Series G at a $7.4 billion price tag. Chime put together a $750 million round at a $25 billion valuation. And Discord was reported to be hunting up new cash that would value it at around $15 billion.
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Each funding round has something special about it that we need to discuss. Why? Because while it’s well known that the unicorn market is crowded — reaching a $1 billion valuation in today’s capital-flush markets is no longer particularly rare for startups — the number of startups worth a multiple of that valuation threshold is growing rapidly. And understanding why investors are so willing to buy minute stakes in dozens of private companies worth billions of dollars is key to grokking the crush of investment we see among younger technology startups.
To make the point, CB Insights’ unicorn leaderboard lists 55 companies with valuations of $7.5 billion or more. That’s nearly five dozen companies worth more than Carta after its most recent round. According to the list, 38 of today’s unicorns are worth $10 billion or more.
The 55 startups valued at $7.5 billion and more are worth more than $1 trillion in aggregate, while the 38 decacorns are worth more than $900 billion when counted as a group.
We’ve become too accustomed to simply reading the latest nine-figure round invested at an 11-figure price and shrugging. So, this morning, let’s talk about Carta and Chime and Discord and why each of them may have managed their latest, or anticipated, valuation gain.
When we talk about unicorns, we’re simply discussing a generally growth-oriented cohort of technology upstarts. But once a startup reaches closer to the $10 billion valuation threshold, we’re really talking about ducks increasingly too big for their pond. They are the next set of IPOs both domestically and abroad.
We’ll proceed in alphabetic order, if for no other reason than to ensure that Chime isn’t discussed first. Hunter Walk’s enjoyment of his early investment in the company must be diminished at all costs. So, we begin with Carta.
Carta prices itself, makes investors eat its dog food
That Carta raised more capital at a new, higher price is not in and of itself too exciting. Sure, the cap table management and valuation software company is doing well, but raising new capital is one of Carta’s skills. It raised funds in 2017, 2018, 2019 and 2020. Seeing the company raise more? Normal.
But how Carta priced itself is incredibly interesting. A $100 million sale of Carta shares on its own secondary market led to the company being priced at $6.9 billion. So, when Carta raised its latest $500 million infusion, it used that as its pre-money valuation.
To say that this is bold is an understatement. Recall that secondary sales of stock in companies like Uber, Robinhood and Coinbase before their own IPOs wound up overestimating their worth; secondary sales of stock are not perfect price indicators for the value of a unicorn at its later point of liquidity.
That fact did not stop Carta from raising capital using its market-set price.
Looking ahead, Carta just demonstrated a new way to price private equity for later investment. What’s stopping other unicorns from following suit, showing investors when they next raise capital that they are worth x billions of dollars thanks to a secondary exchange? Will investors be willing to accept this pricing mechanism more broadly?
Carta’s round could prove to be an aberration, like Google’s reverse Dutch auction IPO. Or it could prove to be a bellwether. Either way, it shows just how willing capital sources are to pay for tech shares that they consider durable over the long haul. Such buckets of funds are even willing to outsource their price discovery, we’ve learned.
Chime’s curious capital thirst
As with Carta, that fintech Chime raised more capital is not shocking. The company picked up new cash every year since 2016. Sure, the new capital values the company at a roughly $25 billion price tag, up $10 billion or so from its 2020 private-market valuation, but that sort of heady gain in worth is, again, not an incredible surprise.
I am more confused as to why Chime decided to raise more capital at all. With a 2022 IPO supposedly in the cards, Chime will have access to lots of new capital in less than a year. While it is somewhat common for companies on their way to a public offering to raise one final slug of cash before they do file, Chime is unique in a way that makes its own fundraising a bit weird.
From the last time Chime raised last year, its $485 million round put together a $14.5 billion valuation:
Tucked inside a CNBC article that broke the story was news that Chime is now EBITDA profitable and could be “IPO-ready” in its CEO’s eyes in around a year’s time.
TechCrunch reached out to Chime for clarification on the EBITDA point, asking if the figure is adjusted or not, as many EBTIDA metrics remove the cost of share-based compensation given to their employees. According to Chime, the metric is “true EBITDA,” to which we award an extra five points. In response to a growth question, Chime said that its “transaction and top-line” has tripled compared to the year-ago period.
Around a year ago, then, Chime was profitable in a manner generally free of hijinks. While we will always prefer GAAP net income to unadjusted EBITDA, getting to plain-text positive earnings before interest, taxes, depreciation and amortization is a big accomplishment for a company growing as quickly as Chime was at the time.
But if it was pretty much profitable when it raised a half-billion last year, why does Chime need more cash ahead of an IPO? Perhaps it wants to do some deals ahead of its debut; cash would help with that. Perhaps it has a big product push ahead of itself, or maybe it raised its burn after its 2020 round? Does Chime want to pursue a direct listing next year, making this effectively its IPO round?
I don’t know, but the scale of raised capital in the Chime round has me curious. What we really need now are some leaked Chime financials to help make this all a bit easier to understand.
Discord’s harmonious new valuation
Unlike Chime, chat platform Discord is not known to be a profitable company. But that isn’t stopping it from attracting what could be a decacorn-and-a-half valuation in its next funding event.
The Wall Street Journal reported earlier this year that Discord saw revenues of around $130 million last year, up from $49 million in 2019. Presuming that the company is still growing at a rapid pace, it would not be crazy to impute a $200 million or greater annual run rate for the company today. That would make a $15 billion valuation roughly 75x its current run rate.
Rich? Yes. Impossible? Absolutely not. Not at today’s prices.
Which brings us back to the more traditional startup market. These rounds are an inducement for earlier-stage investors to keep the cash tap turned firmly on. Why? Because they are indicators that later-stage and crossover investors are willing to provide strong markups to prices that earlier investors paid. And that there’s lots of room for startups to raise at valuations north of $5 billion. That’s a price level at which earlier investors would not struggle to find pre-IPO liquidity.
That means less risk for early-stage startup investors as long as the ocean of late-stage capital in the market today continues to lap at the feet of startups that so many are betting are tomorrow’s leading public tech companies. To see all three of the above events occur as last week closed was merely confirmation that the market for tech shares is still more than animated in the private markets.
Public company tech multiples are perhaps done growing for now, but that isn’t stopping the private technology pricing circus from daring itself to new heights, and even more daring investments.