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.

I'm not suggesting another bubble is in place here, but clearly Fidelity is less bullish in its own investments and saw the need to start lowering expectations. Fidelity's actions are by no means reflective of the actual value of the company going down. But it doesn't send a very positive signal to outsiders if investors of a particular private company, who are likely privy to key financial information that the general public is not entitled to, are suddenly lowering their initial valuations.

As an outsider, it's always interesting to view news like this and try and make sense of it all. But I guess the main lesson here is that not all things shiny and bright end up being valuable. 

Link here to the data from