Why Fidelity and Other Large Investment Firms Are Cutting Startup Valuations

Every big investor has a formula in order to avoid unsustainable risk. Big investment funds are cutting valuations because their warning signs are flashing.

But record flows of money are stuffing venture capitalists' coffers.

Sounds like a great opportunity for anyone who can figure out what to buy - and what to sell. JL

Leslie Hook reports in The Financial Times:

Fidelity Investments has cut the valuations on many of the start-ups in which it owns shares, underscoring the adjustment under way in Silicon Valley as investors become more sceptical. Among Fidelity’s heaviest writedowns were enterprise software companies. The cooling valuations have so far had little impact on capital flows to venture capital groups.
Fidelity Investments has cut the valuations on many of the start-ups in which it owns shares, underscoring the adjustment under way in Silicon Valley as investors become more sceptical.

Among Fidelity’s heaviest writedowns were enterprise software companies Cloudera and Dropbox, which had the value of their shares cut by 38 per cent and 20 per cent, respectively, from the end of January to the end of February.

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Enterprise software companies that rely on subscription sales have come under particular scrutiny because their business models often rely on heavy marketing to drive growth.
Cloudera, which sells software to help companies manage big data, has delayed listing at a time of volatility in the public markets, even though many analysts expected it might try for an initial public offering last year. There have been no tech IPOs this year, after several tech companies went public last year at valuations lower than they earned on the private markets.

Dropbox, known for its photo and document sharing services, has been trying to move from consumer sales to a model that emphasises enterprise sales. However, the company has struggled with several new products that have not performed as well as hoped.

Fidelity mutual funds also wrote down the value of software companies such as Nutanix, Delphix, Cloudflare and Appirio in monthly holdings reports released on Wednesday. The carrying value of these shares is determined by an independent team of analysts who draw on public company share prices, recent share transactions and revenue updates.

The value of a handful of companies increased, including Snapchat, the app known for its disappearing messages.

In February Fidelity increased its investment in Snapchat as part of a follow-on round even though Fidelity’s own analysts had marked down the value of Snapchat shares last year. The new investment, at about $30 per share, in effect resets Fidelity’s valuation of Snapchat back to its previous levels. Fidelity declined to comment.

The cooling valuations have so far had little impact on capital flows to venture capital groups. Preliminary data from Dow Jones VentureSource show that US venture capital companies have raised more money in the first quarter of this year than in any quarter since the dotcom bubble.

Huge sums are still flowing to start-ups too, and as valuations come down, some investors are starting to see better opportunities to invest. Last year, venture capital groups invested $58.8bn in start-ups in the US, the second-highest level in the past 20 years, according to a report from PwC and the National Venture Capital Association.

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