November 13, 2015

Valuating Startups

I read news today that Fidelity Investments has marked down the prices of some of the startups it has invested in earlier in the year. Among the big tech unicorns affected were Snapchat, which was priced down by 25%, and Zenefits, which was marked down by 48%. Other companies affected were Blue Bottle Coffee Co., Dataminr, and NJoy.

Table taken from
Valuating private companies is always a tricky proposition. There is no single clear cut way to do it. We were taught in our MBA to look at future cash flows and while that method is normally sound and logical, it rarely does justice to startups who may have very poor cash flow (and no profit) for several years. The lack of sound financial numbers led to the first tech bubble in the 1990's where investor euphoria for anything "internet" led to some crazy valuations.