The worth of hot technology start-ups seemed for years to go in only one direction: straight up.
Now there are signs of growing unease over the dizzying valuations of some of the most richly priced private companies.
The latest sign has emerged with one such favorite, Snapchat, being discounted 25 percent by one of its more recent investors, Fidelity, the mutual fund giant.
Another start-up, Dropbox, the widely used file storage service, was devalued by the giant asset manager BlackRock this year.
The funds’ markdowns may tap the brakes on a fast-growing market. Investors, in the hopes of getting a piece of the next Facebook or Google, have been pouring billions of dollars into young private companies.
Yet the public stock market has cooled for new technology companies: witness the current effort by Square, a mobile payments company, to go public at a valuation lower than what its last private investment gave it.
The moves by Fidelity and BlackRock reflect how mutual funds can create challenges for technology’s favored start-ups, just as they helped inflate valuations in the first place.
Over the last few years, mutual funds fought to buy pieces of appealing venture-backed companies like Snapchat and Dropbox. The idea was that public investors wanted to own these start-ups because their value was growing faster than that of many publicly traded companies. By owning the private shares, the large mutual funds would also get to know the start-ups and be well positioned to buy their shares when they went public.
As mutual fund and venture capital investors jockeyed with hedge funds and sovereign wealth funds to invest, their abundant capital pushed prices for private shares into the stratosphere.
Snapchat, for example, is valued at more than $16 billion and Dropbox at around $10 billion. The biggest prize of them all, Uber, is now seeking a round of investment that would value the company at $60 billion to $70 billion. Uber’s success with that round would be a further test of investors’ appetite.
The competition among investors also helped create a herd of dozens of “unicorns,” a term for private companies valued above $1 billion, coined when such a phenomenon was still considered rare.
Yet unlike venture capital firms, mutual funds are legally obligated to value each of their portfolio holdings every day, including hard-to-value assets like shares in private companies, and they must report these values at least every half year.