Mutual Fund Investments in Startups and the Valuation Challenge

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It is a common perception that mutual funds are interested in investing their money in publicly traded companies, but they are increasingly showing a keen interest in startups. In 2014, mutual fund firms such as Blackrock, Fidelity Investments, T. Rowe Price and Wellington Management completed between 6–16 US startup investment deals. T.Rowe Price doubled its private tech deals into venture-backed startups in 2014.

According to PitchBook’s 2015 Unicorn Report, T. Rowe Price owns stakes in 14 tech startups, Wellington Management has been involved in funding 12 tech startups while Fidelity has been involved in eight such capital raises.

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This helps mutual fund companies to invest early in a promising startup — and by looking at a startup business, the portfolio manager also gains insights about the market. It also provides him an idea on what this startup disruption means to publicly traded rivals. These advantages come with some risks for mutual fund firms where they face the challenge of valuing a startup and there are also liquidity issues to consider.

Recently in March 2016 , we saw mutual funds companies such as Fidelity, Blackrock and other giants cut value of their stakes at an increased pace making few new investments. According to a securities filing analyzed by the Wall Street Journal in March, Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management — which manage or advise mutual funds that own shares in at least 40 closely — held startups valued at $1 billion or more apiece. Out of this 40, for 13 of the startups, at least one mutual fund companies values its investment at less than what is paid.

When we look at examples of some mutual fund investments in FinTech, Fidelity injected at least $106 million into Zenefits in May 2015 as lead investor in a funding round that increased the San Francisco company’s valuation to $4.5 billion. In September 2015, Fidelity marked down stake by 48% to $7.74 a share from $14.90. According to the San Francisco Business Times, in March 2016, the valuation of Zenefits was less than $2 billion or 65% less than the May 2015 valuation.

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