Fidelity and valuations

My friend Miki Saxon knows I enjoy learning about the financial side of startups and last week she sent an interesting article.

In an appearance on Bloomberg TV, Y Combinator President Sam Altman said that “the whole back and forth and obsession over these markdowns and valuations is a dumb conversation.”

More than a decade ago Private Equity (PE) started investing in later startup rounds, including Facebook. The has accelerated, because of an ongoing trend that has seen more PE, mutual funds, investment banks, etc. moving into the private markets to get access to the current crop of fast-growing startups.

It was investment from companies such as Fidelity, Elevation Partners and Digital Sky Technologies (there are dozens of others) into companies, such as Uber, Dropbox, Snapchat, and Zenefits, that drove the multi-billion dollar valuations for companies with no profits and, in some cases, little actual revenue.

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Image source: here

Mutual Funds, such as Fidelity, do not revalue their holdings privately as do VCs. In November 2015 the investment giant publicly revalued the prices it paid earlier that year. Fidelity marked down its investments in many so-called unicorns, such as Dropbox, Snapchat and Zenefits, which, in turn, lowered their valuation.

Investment from the likes of Fidelity forces startups into the short-term, quarterly thinking that is the bane of Wall Street, unlike venture money or money from deep-pocketed hedge funds, sovereign wealth funds and family offices.

Short-term thinking; continued fund raising instead of exiting (IPO, acquisition, organic growth, etc.), employee valuation-watching and candidates joining for riches, instead of passion are just some ways the startup world has changed.

Join us over the next few weeks as we explore the changes wrought over the last two decades.

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