
Fidelity Devalues Stake in Blue Bottle, Dataminr, Zenefits Following Snapchat - coloneltcb
http://fortune.com/2015/11/11/snapchat-isnt-the-only-startup-in-fidelitys-crosshairs/
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cs702
Imagine the lovely conversations these companies' VC backers will be forced to
have with _their_ fund investors (who will surely ask about Fidelity writing
down the valuations) and with fund auditors (who will surely ask about
lowering the carrying value of those investments to reflect recent market
developments): "Why is your VC fund carrying company X at that much per share?
Fidelity just wrote it down to this much. Please explain."

An immediate consequence of these very public write-downs by Fidelity will be
that every other late-stage pre-IPO investor holding stock in these companies
will likely write them down too. Further consequences are more difficult to
predict. One potential outcome is lower valuations across all investment
stages. Another could be less excitement and slower deal cycles. It could get
harder to raise capital.

~~~
austenallred
It probably goes something like this:

"We thought it was worth more, and it may well be in the future. But if it's
not, that's OK, that's why we have a portfolio of 150 companies; some will
lose money. We plan on that happening to x% of our companies, and on average
we're still lanning on seeing a #x return on the capital you invested."

In other words, this is absolutely an expected part of VC, even at the late
stages.

~~~
JonFish85
To play devil's advocate a bit here, the companies that are being devalued (on
paper) are by definition the so-called "unicorns", or the outliers that VCs
depend on to offset losses to their duds. So if you start knocking off double-
digit percentages from a few of these outliers, pretty quickly your portfolio
takes a huge hit.

Hypothetical situation with some seriously made-up numbers:

* 2x $100k for 5% investment in companies at say a diluted stake of 2% goes from $10B to 5B

* 5x $100k for 5% investment in companies who go bust

* 3x $100k for 5% investment in companies who are acquired, make 10% returns ($110k per).

Total investment: $1m

Return from non-outliers: (5 x $0) + (3 x $110k) => $330k for a net of -$570k

Return from outliers before devaluation (on paper): 2 x .02 x $10B => $400M

Return from outliers after devaluation (on paper): 2 x .02 x $5B => $200M

At this point, the losses/returns of the non-outliers are in the noise. But
man, it hurts to have to explain the "loss" of your upside by such an enormous
amount. I don't think VCs would shrug it off as just a part of their overall
portfolio, since these are the valuations that prop up the overall
performance.

~~~
austenallred
If you invested in the early rounds of any of these unicorns, you probably
returned the whole fund with that one investment, even given their devaluing.

~~~
JonFish85
Even in that case though, nobody is going to be happy with less money than
they thought they had. If Bill Gates woke up tomorrow with half of his money
gone, he'd be livid, even though he'd still have more money than he knows what
to do with.

~~~
austenallred
They didn't ever have any money. They didn't lose any money. It was all paper
valuations, and it's never money until you can buy beer with it; that's just
part of investing. Does it suck? Sure, but it's part of the game.

------
mrmcd
One thing I read that isn't often mentioned is how liquidation preference for
late rounds can drive a lot of these insane valuations.

For example, let's say you raise $250MM in a series E at a 10B post money. As
a company/founder, this makes you look awesome on paper and super valuable as
a company. Meanwhile, the series E investors usually have the top priority for
liquidation, meaning the risk is actually pretty small, since the sale/IPO
value would have to go below 250MM before you lose money.

The real people getting screwed by these paper unicorns though are the late
stage employees being sold options as compensation.

~~~
dubroff
What do you mean by this "The real people getting screwed by these paper
unicorns though are the late stage employees being sold options as
compensation"?

I'm currently a student job searching and this seems pretty relevant.

~~~
balls187
Employees and Investors of private companies hold different class(es) of
stock.

Employees (and Founders) have common stock, while Investors get preferred
stock.

Preferred stock carries with it a "liquidation preference", which basically
means holders of that stock get paid out first during a liquidity event,
including some multiple of their original investment. What ever is left, is
divided among the holders of common stock.

If the company is publicly traded, then all owners of stock hold the same
class of stock (common).

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jgrahamc
I removed all the companies that stayed completely flat or were marked down at
some point. Those that remain:

    
    
        Cloudflare (Series D)               $4.35M   $4.90M   $4.90M
        Honest Co. (common)                 $4.06M   $6.87M   $6.87M
        Honest Co. (Series C)               $9.48M  $16.03M  $16.03M
        Meituan Corp. (Series D)           $10.00M  $12.29M  $15.71M
        SpaceX (Series G)	                $7.54M   $7.54M   $8.66M
        Uber (Series D)	               $80.00M $204.42M $204.42M
        Uber (Series E)	                $3.42M   $4.07M   $4.07M

~~~
x0x0
those columns are, btw,

    
    
       company name                        price    price    price
                                           paid     31 july  30 sept

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chad_strategic
The reality here is is Fidelity is getting ahead of the curve. Chances are
pretty good interest rates are going to rise in Dec. Some money will follow to
these risk free interest instruments (savings, Bonds) Why take such a risk on
on a start up with say a 1 in 50 chance of payout, when you can get 1% return
on investment at no risk?

Unicorns can only exist in ZIRP. (Zero interest Rate Policy)

In laymen's terms it's called a bubble.

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code4tee
Lots of bombed IPOs recently followed this track. If they IPOed at 1 (what
they were likely worth) and went to 1.2 they'd be seen as a solid company with
great growth potential.

Instead they IPO at 5, fell to 2 and are really worth 1. Now they're seen as a
hopeless train wreck that can't be saved and sign of a "bubble."

A silly high paper valuation during funding rounds makes for fun press
releases, but it can cause a ton of headaches later (if the company isn't
actually worth those amounts... and most aren't).

~~~
JonFish85
Hopefully this doesn't border on the "conspiracy theory" side too closely, but
if a company is able to IPO at 5x what they're "actually" worth, the company
still gets that cash, so what happens to the stock price after that doesn't
matter from the perspective of the company accountants.

A couple of examples:

Groupon: IPOed at $20/share, raising ~$700m. They are currently trading in the
$2.70 range. From a company perspective, they killed it by IPO-ing -- they
took $700m worth of cash, most of which I believe they still have (as of a few
months ago they still had ~$1bn in cash equivalents).

Zynga: IPOed at $10/share, raising roughly $1bn. They are currently trading at
$2.48. Same basic story as above. Their current market cap is just about
double what they raised in cash at their IPO.

So from two perspectives, these companies did exceedingly well: their
investors and founders likely cashed out most of their chips at IPO, so they
made a killing, and the company received a tremendous amount of cash for their
coffers. Sure, Groupon and Zynga booted their CEOs, but they don't care much,
and I'm sure whoever they got to replace them is handsomely compensated
(regardless of how well they do).

So who gets screwed? Employees, who don't get to sell their shares until the
company has tanked, and whichever investors are stuck holding the bag after
IPO. But after the IPO, there's not much of an incentive for these early
people to care about that; if they get canned, who cares, they'll cash out
their $100m worth of compensation and go work at some other company down the
street.

~~~
code4tee
Well yes, "bombed IPO" is a relative term. If you float a pile of trash onto
the stock market and rake in a lot of $$$ then sure cash out and go live on a
nice tropical island somewhere while leaving a smoking crater behind full of
employees holding worthless options. From the early investors standpoint
that's a win.

However, that can only happen so many times before the "suckers" that were
buying these things at IPO catch on and lose their appetite. That sort of
thing is in part what's happening and in part why these write downs are
occurring. The paper valuation during funding rounds is only real if the "real
market" (i.e. everyone, not just a few VCs writing founders a cheque) is
willing to buy shares at that value. If the market continues to get more
skeptical, and there's every indication that this will continue to be the
case, then down rounds are an almost certainty moving forward for many firms.

That's also a big problem for employee options, which typically only have
value if the valuation keeps skyrocketing.

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npalli
So, here is the list of unicorns that Fidelity has invested with individual
gains/losses shown. Turns out for the entire unicorn fund, it is about 36%
above cost.

[http://www.valuewalk.com/wp-
content/uploads/2015/11/Fidelity...](http://www.valuewalk.com/wp-
content/uploads/2015/11/Fidelity-unicorns.png)

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rokhayakebe
1) You have a company you know is worth $50 million.

2) You are smart; you scream and yell and tell everyone it's worth $1.3
billion.

3) Now even the smartest analyst is going to say you are worth $750 million.

4) A year later, the market is down. You are really worth $40 million.Some
executives at big co "swoop" you for $550 million in what they call a steal +
you needed the money.

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a3n
I don't know what I'm talking about. I wonder if these devaluations are to
give Fidelity a tax loss.

~~~
maxerickson
Taxes (at least mostly) apply to realized gains or losses. This is Fidelity
telling their customers what their holdings are worth.

~~~
mattmaroon
Yeah everyone here seems convinced they're trying to game some system. I think
Occam's razor is right here. They really just think those companies are worth
less than they were.

But, I still wouldn't worry about that too much directly. As the article
mentions, it's more art than science. If I were Zenefits I don't think I'd be
sweating it.

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akg_67
Basically, Fidelity lost money investing in private companies. Only reason the
Fidelity private investment is in the black because of the higher valuation of
Uber Series E round that "artificially" inflated the value of the Fidelity
shares from previous Uber Series D round.

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applecore
What methodology does Fidelity Investments use to determine the valuation of
their stake in these privately-held companies?

~~~
immad
Given the size of investment they probably get access to quarterly company
accounts.

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gtpasqual
Im not on the side of VCs, but many are victims, not guilty, of this.

Usually, institutional investors(e.g. Fidelity) give money to VC funds that
spend most of their time finding good and reasonable investments.

However, Fidelity and other institutional investors have been investing in
late-stage deals, "cutting off" many VC funds and increasing valuation of
companies.

[http://www.bain.com/publications/articles/shadow-capital-
ste...](http://www.bain.com/publications/articles/shadow-capital-steps-into-
spotlight-forbes.aspx)

------
gtpasqual
This the updated and full list:

[http://fortune.com/2015/11/12/fidelity-marks-down-tech-
unico...](http://fortune.com/2015/11/12/fidelity-marks-down-tech-unicorns/)

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vasilipupkin
surprised to see Zenefits on this list. I thought it was a highflyer.

~~~
tomasien
According to accounts there were bidders from 2B to 3.5B and Fidelity came in
at 4.5B at the last second to win the bid. The fact that they now wrote it
down to the range others were bidding at is essentially meaningless.

~~~
vasilipupkin
it's not meaningless. It's a data point that adds to support the theory that
late stage private valuations are too high and companies should be going
public sooner.

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gtpasqual
_MongoDB (Series F, 8%)_

 _$32 M $16.74 M $14.77 M_

I'm not surprised

~~~
selimthegrim
source? PitchBook?

~~~
gtpasqual
no, they have updated this link with an updated version

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downandout
This undoubtedly has to do with the $2 billion haircut that Square's late-
stage investors are taking on its IPO. But it's really Fidelity's fault. If
you offer money at ridiculous valuations, guess what? People are going to take
you up on it, and you're going to lose money.

~~~
Eridrus
Square's late stage investors had a ratchet, so they're not actually taking
any haircut at all; they're getting a 20% return in a year.

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ogezi
Well, this is certainly undesirable.

~~~
cryptoz
Is it undesirable, though? Maybe I am misunderstanding what Fidelity is doing,
but it seems to be a careful reconsideration of the very high valuations
placed on these startups. This kind of re-adjustment is exactly what would be
necessary to keep the market stable and avoid a runaway bubble, right?

~~~
potatolicious
That's my read too - if we want to prevent a pop we need to be letting air out
of the balloon regularly.

Some skepticism from investors is good, more due diligence re: valuation is
good. This is a pretty mild correction overall, which is good for everyone.

I'd be much more worried if Fidelity were snapping up startup shares at ever-
higher valuations without ever reckoning actual performance.

As people who work in the industry, this might mean a mild slowdown in hiring
as funding becomes a bit more difficult, but it also may prevent the
catastrophic alternative which is the bottom falling out from under us and
massive tech-sector unemployment.

Personally I think all of these recent announcements are _good_ for startup
employees. For the last few years some of us have been expressing a lot of
skepticism about the real value of startup options and how much they can
realistically exit for. Between valuation write-downs like this, and the face-
plant IPOs of the last couple of years, I think people are starting to see the
true value of startup options and I hope it results in people being _much_
more discerning about how they're being compensated.

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gtpasqual
Anyone else realized Fidelity only invested $3.42M on Uber's Series E ??

They raised 1B in that round.

~~~
JonFish85
My naive guess on this is that they had provisions in place to avoid being
diluted, so they took advantage of that.

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mesozoic
Kudos to Fidelity for doing the right thing for their investors.

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malchow
So Fido wasn't great at investing in emergent technology. It paid too much and
chased what it saw as 'performance,' applying a Wall Street paradigm to
something entirely different. I don't think this result is a surprise, and I'd
say it's very, very good for the health of the technology economy.

~~~
malchow
Any downvoters want to explain?

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pbreit
Is Fidelity unimportant enough for this to diminish deal flow?

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tomasien
Overall dollar for dollar it's even or in the black for Fidelity for what it's
worth because of the massive Uber write ups.

Seems like a non-event to me, people just want to believe these valuations are
insane. Are you really feeling that much better that Snapchat is worth $10bn
instead of $15bn if you hate Snapchat?

~~~
sbisker
The fact Fidelity is being this transparent is _great_ news for engineers in
the startup scene considering or holding jobs at these companies.

No longer can managers keep selling a dream that was last pitched years ago at
their last funding round; they'll have to compensate for underwater options
with rising salaries or grants to keep talent around. Certain startups have a
habit of delaying sharing bad news with their employees to the very brink of
collapse; this behavior will now be in check somewhat.

~~~
chatmasta
So by publicly devaluing a portfolio company, Fidelity increases that
company's hiring costs. How is that in Fidelity's best interest? Sure, they're
devaluing the company, but they still have a stake in it... why be so public
about the devaluation?

~~~
a3n
I imagine Fidelity's fund customers would want to know.

~~~
etrain
Fiduciary Duty.

~~~
toomuchtodo
Which is _far_ more important (from a liability standpoint) than pissing off
companies you're invested in.

