Unicorns Aren't So Beloved Anymore
The way a bubble works is, people get enthusiastic about a thing, so they buy a lot of it, and its price goes up. Then people realize the price is too high, so they sell a lot of it, and the price goes down. All of your favorite market things -- supply and demand, buyers and sellers, the price mechanism -- get a workout. It is a good time, unless you bought the thing near the top.
Today's Wall Street Journal has a terrific story about how mutual funds that bought stakes in large closely held technology companies are now writing down some of those stakes:
BlackRock Inc., Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management run or advise mutual funds that own shares in at least 40 closely held startups valued at $1 billion or more apiece, according to securities filings analyzed by The Wall Street Journal.One way to read this story is that there was a unicorn bubble and it popped. But it has played out, as it were, without markets -- or at least, without market trading of those unicorns' shares. (At least, on the way down.) Instead, the mutual funds' portfolio managers got enthusiastic about unicorn shares, so they bought a lot of them, and their prices went up. And then the mutual funds' valuation committees realized that the prices were too high, so the prices went down. Selling wasn't required: The committees just decided on the price, and that was the price.
For 13 of the startups, at least one mutual-fund firm values its investment at less than what it paid, the Journal’s analysis shows. Those firms are valuing the 13 companies at an average of 28% below their original purchase price.
I mean, it wasn't exactly the price. A mutual fund valuation committee's decision that, say, Zenefits is worth 30 percent less than it was a few months ago doesn't necessarily mean that anyone bought or sold shares at the new lower price. But in other ways, those numbers really are performing the functions of a price mechanism. For instance, lower "prices" are telling investors to allocate less capital to unicorns:
No U.S.-based, venture-backed technology companies have gone public so far this year. Last year, 16 such companies had IPOs, down from 30 in 2014. Their shares had fallen more than 30% on average as of mid-February.And the big mutual fund companies in the story -- Fidelity, T. Rowe Price, BlackRock, Wellington -- are themselves making fewer startup investments than they did in previous quarters. The regular workings of the price mechanism are unnecessary: You don't need buying and selling; pure abstract contemplation by committees at investment firms is enough to create a market price. Economists have long debated how prices could be set and resources allocated by a central planner without the use of market mechanisms to signal demand. This is called the socialist calculation problem, and it is pleasing that late-stage unicorn capitalism has solved it.
The suffering stock market is likely to keep the IPO pipeline shut to companies that previously raised capital at lofty valuations and don’t want to go public at a lower price.
I mean, I kid, a little. These prices are based on market transactions...MUCH MORE
