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Comment by cs702 | Hacker News Reader

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.

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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.

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.

Despite these numbers being entirely made up, they seem to illustrate the counterpoint to your argument perfectly, a 200x return is insane by any standards, sure you'd like it to be 400m, but you're not going to regret getting into VC as a class if this is what the numbers looked like.

One thing to consider is that a power law distribution (which is how VCs see their investments), remains a power law distribution no matter how far you zoom in, so even in the "unicorn" bracket, they expect a few of the unicorns (Uber/The Honest Co) to do most of the work.

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.

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.

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.

This is the double-edged sword of allowing institutional investors to jump in to pre-IPO companies. They can provide staggering sums of money and allow you to put off your IPO for longer, but they bring with them many of the pain points that an IPO does. Retail investors and HFTs aren't the ones causing boardroom drama over margin and sales numbers, and the institutional guys won't put up with any accounting shenanigans (a la Groupon).

I really wonder if, after all the dust settles, many of these "unicorns" would have been better off IPOing around a $1-5 billion valuation. For sure their early investors will be if the late-round institutional guys are writing down their holdings by this much.

Yea, I think the industry seems to have been caught off guard by how aggressive the mutual funds have been with their mark-to-market valuations. This public data will likely have to be factored into the valuation methodologies of the private investors in these deals. Absent of this, Unicorn valuations were probably going to take a much longer time to deflate.

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