 "Dizzying ride may be ending for start-ups")
The worth of hot technology start-ups seemed for years to go in only one direction: Straight up.
Now there are signs of growing unease over the dizzying valuations of some of the most richly priced private companies.
The latest sign has emerged with one such favorite, Snapchat, being discounted 25 per cent by one of its more recent investors, Fidelity, the mutual fund giant.
The funds' markdowns may tap the brakes on a fast-growing market. Investors, in the hopes of getting a piece of the next Facebook or Google, have been pouring billions of dollars into young private companies.
Yet the public stock market has cooled for new technology companies: witness the current effort by Square, a mobile payments company, to go public at a valuation lower than what its last private investment gave it.
The moves by Fidelity and BlackRock reflect how mutual funds can create challenges for technology's favored start-ups, just as they helped inflate valuations in the first place.
Over the last few years, mutual funds fought to buy pieces of appealing venture-backed companies like Snapchat and Dropbox. The idea was that public investors wanted to own these start-ups because their value was growing faster than that of many publicly traded companies. By owning the private shares, the large mutual funds would also get to know the start-ups and be well positioned to buy their shares when they went public.
As mutual fund and venture capital investors jockeyed with hedge funds and sovereign wealth funds to invest, their abundant capital pushed prices for private shares into the stratosphere.
Snapchat, for example, is valued at more than $16 billion and Dropbox at around $10 billion. The biggest prize of them all, Uber, is now seeking a round of investment that would value the company at $60 billion to $70 billion. Uber's success with that round would be a further test of investors' appetite.
The competition among investors also helped create a herd of dozens of "unicorns," a term for private companies valued above $1 billion, coined when such a phenomenon was still considered rare.
Yet unlike venture capital firms, mutual funds are legally obligated to value each of their portfolio holdings every day, including hard-to-value assets like shares in private companies, and they must report these values at least every half year.
A spokesman for the Investment Company Institute, one of the largest mutual fund associations, said that the process was a "good faith determination" of what an owner could get in a sale of the asset.
"This assessment has been widely recognized to be more art than science," said Mike McNamee, a spokesman for the institute.
Indeed, there are often discrepancies between mutual funds that own pieces of the same private companies, often because they can each negotiate for special treatment that other investors may not get.
"There is also room for different funds to make different judgments about how much they could get in a sale," said David L. Larsen, a managing director at Duff & Phelps, a firm that helps mutual funds value their private company shares.
Most of the largest mutual fund companies, including BlackRock and T. Rowe Price, have pricing committees that work independently from the portfolio managers who bought the shares. This is done, Larsen said, to prevent money managers who might have a stake in keeping a valuation high from influencing the valuation.
In the case of Fidelity, it valued its stake in Snapchat at $22.91 a share as of Sept. 30, down from $30.72 in the previous quarter, according to data compiled by the research service Morningstar.
The move by Fidelity was reported earlier by The Financial Times. The markdown of Dropbox by BlackRock was reported earlier by The Information.
One late-stage investor in Dropbox said that the drop in that company's value by mutual funds was a result, in large part, of the fact that the company is often compared with Box, a storage company that went public in January and currently has a market value of about $1.6 billion.
Dropbox, by comparison, was valued in its last fund-raising at around $10 billion. The large discrepancy between Box's market capitalization and Dropbox's private valuation has become a factor as mutual funds worked to create an accurate estimate of how much their Dropbox shares were worth.
It is unclear why Fidelity marked down its investment, and whether the move was because of faltering performance in Snapchat or because of rough comparisons to publicly traded social media companies. Twitter, for example, suffered a nearly 26 per cent drop during the third quarter, though Facebook rose almost 5 per cent during that same time.
But those companies are very different from Snapchat, making comparisons difficult if not impossible. The service is a combination of photo and video messages - including the famous disappearing photos that first made its name - and a publisher of mobile content from companies like Vice and CNN through its Discover section.
Without a fair publicly traded comparison, mutual funds may compare the revenue and user projections that private companies made when they last raised money to their current performance, Larsen of Duff & Phelps said.
"The mutual funds look at whether the company is hitting the targets it created," he said, declining to comment specifically on Snapchat.
Snapchat's popularity with younger users has earned it the admiration of financial firms from Wall Street to Silicon Valley and beyond, with the Alibaba Group of China among its investors.
Snapchat has been focused on generating revenue through advertising in Discover, the news platform that it introduced in January.
Yet the company has suffered from turmoil of late, including the departure of several high-level executives over the last year or so. Among them: its previous head of communications, a chief operating officer and a top engineer. And investors and analysts have questioned whether Discover could live up to Snapchat's promises.
Representatives for both Fidelity and BlackRock declined to comment. Dropbox also declined to comment.
A spokesman for Snapchat declined to comment.
©2015 The New York Times News Service
Now there are signs of growing unease over the dizzying valuations of some of the most richly priced private companies.
The latest sign has emerged with one such favorite, Snapchat, being discounted 25 per cent by one of its more recent investors, Fidelity, the mutual fund giant.
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Another start-up, Dropbox, the widely used file storage service, was devalued by the giant asset manager BlackRock this year.
The funds' markdowns may tap the brakes on a fast-growing market. Investors, in the hopes of getting a piece of the next Facebook or Google, have been pouring billions of dollars into young private companies.
Yet the public stock market has cooled for new technology companies: witness the current effort by Square, a mobile payments company, to go public at a valuation lower than what its last private investment gave it.
The moves by Fidelity and BlackRock reflect how mutual funds can create challenges for technology's favored start-ups, just as they helped inflate valuations in the first place.
Over the last few years, mutual funds fought to buy pieces of appealing venture-backed companies like Snapchat and Dropbox. The idea was that public investors wanted to own these start-ups because their value was growing faster than that of many publicly traded companies. By owning the private shares, the large mutual funds would also get to know the start-ups and be well positioned to buy their shares when they went public.
As mutual fund and venture capital investors jockeyed with hedge funds and sovereign wealth funds to invest, their abundant capital pushed prices for private shares into the stratosphere.
Snapchat, for example, is valued at more than $16 billion and Dropbox at around $10 billion. The biggest prize of them all, Uber, is now seeking a round of investment that would value the company at $60 billion to $70 billion. Uber's success with that round would be a further test of investors' appetite.
The competition among investors also helped create a herd of dozens of "unicorns," a term for private companies valued above $1 billion, coined when such a phenomenon was still considered rare.
Yet unlike venture capital firms, mutual funds are legally obligated to value each of their portfolio holdings every day, including hard-to-value assets like shares in private companies, and they must report these values at least every half year.
A spokesman for the Investment Company Institute, one of the largest mutual fund associations, said that the process was a "good faith determination" of what an owner could get in a sale of the asset.
"This assessment has been widely recognized to be more art than science," said Mike McNamee, a spokesman for the institute.
Indeed, there are often discrepancies between mutual funds that own pieces of the same private companies, often because they can each negotiate for special treatment that other investors may not get.
"There is also room for different funds to make different judgments about how much they could get in a sale," said David L. Larsen, a managing director at Duff & Phelps, a firm that helps mutual funds value their private company shares.
Most of the largest mutual fund companies, including BlackRock and T. Rowe Price, have pricing committees that work independently from the portfolio managers who bought the shares. This is done, Larsen said, to prevent money managers who might have a stake in keeping a valuation high from influencing the valuation.
In the case of Fidelity, it valued its stake in Snapchat at $22.91 a share as of Sept. 30, down from $30.72 in the previous quarter, according to data compiled by the research service Morningstar.
The move by Fidelity was reported earlier by The Financial Times. The markdown of Dropbox by BlackRock was reported earlier by The Information.
One late-stage investor in Dropbox said that the drop in that company's value by mutual funds was a result, in large part, of the fact that the company is often compared with Box, a storage company that went public in January and currently has a market value of about $1.6 billion.
Dropbox, by comparison, was valued in its last fund-raising at around $10 billion. The large discrepancy between Box's market capitalization and Dropbox's private valuation has become a factor as mutual funds worked to create an accurate estimate of how much their Dropbox shares were worth.
It is unclear why Fidelity marked down its investment, and whether the move was because of faltering performance in Snapchat or because of rough comparisons to publicly traded social media companies. Twitter, for example, suffered a nearly 26 per cent drop during the third quarter, though Facebook rose almost 5 per cent during that same time.
But those companies are very different from Snapchat, making comparisons difficult if not impossible. The service is a combination of photo and video messages - including the famous disappearing photos that first made its name - and a publisher of mobile content from companies like Vice and CNN through its Discover section.
Without a fair publicly traded comparison, mutual funds may compare the revenue and user projections that private companies made when they last raised money to their current performance, Larsen of Duff & Phelps said.
"The mutual funds look at whether the company is hitting the targets it created," he said, declining to comment specifically on Snapchat.
Snapchat's popularity with younger users has earned it the admiration of financial firms from Wall Street to Silicon Valley and beyond, with the Alibaba Group of China among its investors.
Snapchat has been focused on generating revenue through advertising in Discover, the news platform that it introduced in January.
Yet the company has suffered from turmoil of late, including the departure of several high-level executives over the last year or so. Among them: its previous head of communications, a chief operating officer and a top engineer. And investors and analysts have questioned whether Discover could live up to Snapchat's promises.
Representatives for both Fidelity and BlackRock declined to comment. Dropbox also declined to comment.
A spokesman for Snapchat declined to comment.
©2015 The New York Times News Service