A Blog by Jonathan Low

 

Mar 6, 2016

Mutual Funds Sour on Start-Up Investments

The 'Greater Fool Theory' of investing has always justified seemingly improbable investments in 'story' companies by insisting that investors' wishes not to miss out on what could be the next great thing will outweigh their inherent skepticism, meaning that some greater fool will come along to take the depreciating asset off their hands.

The problem now is that all those earlier technology and data companies have reduced the information asymmetries which made the theory so broadly actionable. That and the fact that the financial crisis wiped out and/or scared away many of the small and casual investors who constituted the mass mobilization of greater fools.

The current tech run-up has expanded far beyond its logical past due date, especially given the dearth of really new innovations. These stocks were never really appropriate for the proverbial widows and orphans whose fiduciary interest the professional investors were sworn to serve, but their growth made them irresistible. Reality has now intervened and the consequences are unavoidable.  JL

Rolfe Winkler and Scott Austin report in the Wall Street Journal:

Mutual funds that helped fuel the technology boom are cutting the value of their startup investments at an accelerating pace and are making fewer new investments. Firms are valuing (some) companies at an average of 28% below their original purchase price.
Mutual funds that helped fuel the technology boom are cutting the value of their startup investments at an accelerating pace and are making fewer new investments.
These are ominous signs for Silicon Valley, where a flood of money into young companies pushed valuations skyward, and subsidized hiring sprees and advertising binges at scores of companies.
The mutual-fund pullback threatens to deepen a wider downturn that has already led to falling valuations, shrinking ambitions and layoffs as the receding tide of capital forces startup companies of all kinds to focus on the bottom line rather than growth at any cost.
BlackRock Inc., BLK 0.19 % Fidelity Investments, T. Rowe Price Group Inc. TROW 0.61 % and Wellington Management run or advise mutual funds that own shares in at least 40 closely held startups valued at $1 billion or more apiece, according to securities filings analyzed by The Wall Street Journal.
For 13 of the startups, at least one mutual-fund firm values its investment at less than what it paid, the Journal’s analysis shows. Those firms are valuing the 13 companies at an average of 28% below their original purchase price.

The companies include mobile-messaging service Snapchat Inc., note-taking software maker Evernote Inc. and health-insurance brokerage Zenefits.

The Startup Stock Tracker

The Wall Street Journal is tracking changes in mutual funds’ estimates of share prices in startup companies that are valued at $1 billion or more.

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