Main Street Gains Startup Bubble Exposure

The good news is that Main Street has now gained a toehold in the new national pastime, throwing money at software programmers as they seek to disrupt every industry under the sun and roll out essential new services we can’t imagine living without (It’s like Uber, but for twisting the cap back on your Poland Spring bottle for you). Retail investors can thank the mutual funds who have become the new financiers of Silicon Valley early- and late-stage funding rounds. The democratization of insane wealth creation has finally come to your IRA.

The even better news is that Fidelity, T. Rowe Price et al are getting mom and pop into these deals right at the ground floor – before they become the Facebooks and the Instagrams of tomorrow. And there are probably another twenty or thirty Facebooks just waiting in the wings for a little bit of walking-around capital.

Some pull quotes from a mind-blowing Bloomberg article that’s so chock-full of nuggets that it could pretty much serve as a digital time capsule for the current moment:

Hedge funds and mutual funds that once shunned venture-style deals are flocking to the market’s hottest corner, paying 15 to 18 times projected sales for the year ahead in recent private-funding rounds, according to three people with knowledge of the matter. That compares with 10 to 12 times five years ago for the priciest companies, one said.

and…

Companies now valued at 16 times future revenue could easily lose a third of their value in a market pullback that Weber and others say may occur in the next three years. The other people asked not to be named because they didn’t want to be seen criticizing competitors’ deals.

LOL, throwing shade anonymously – sounds like someone got left out of the last jackpot deal! What else?

Mutual funds and hedge funds have elbowed into late rounds, both to boost returns and to ensure they can buy blocks of shares in IPOs as competition for tech offerings intensifies. Mutual-fund giants Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management Co….took part in at least 37 pre-IPO funding rounds totaling $5.55 billion from 2012 to 2014

Is that a lot of money?

“Mutual- and hedge-fund dollars coming is one of the main things driving these higher valuations and larger deal sizes…You didn’t used to see that before. The trend is accelerating.”

Oh, okay…

Investors of all stripes poured $59 billion into U.S. startups last year…Late-stage companies received two-thirds of it, with a record 62 firms raising money at valuations of $1 billion or more, almost three times as many as in 2013. About half the investors weren’t venture-capital firms.

Oh. Oh wow. Half of the investors in startups are amateur startup investors. Well, they’re not virgins anymore.

I have to admit, I’m a bit torn here. Part of me knows how this is going to end. The other part of me says: Well, it’s not the growth mutual funds’ faults that startups are going public much later. In another era, these would have been public market investments in early stage growth companies and their inclusions into these funds would have been perfectly normal.

And by the way, who could blame a company like Fidelity, which the article says led a financing round for Uber at a $17 billion valuation (yes, they led it). If a fund makes money from something like this, it counts as 100%, pure, unadulterated alpha! The Uber IPO, like the Alibaba IPO before it, won’t appear in any indexes. Pure alpha has become nearly impossible to come by in this day and age. Less than 15% of domestic stock funds managed to keep up with, let alone beat, their respective benchmarks last year – alpha like this is a glass of water in the desert.

So I get it, and I’m not hating. Opportunity is knocking and people with capital and ambition are answering the call. The mutual funds are simply joining in on a huge parade of folks headed West – this morning we found out that Morgan Stanley’s CFO is leaving to join Google. The news item was echoed widely among the growing cacophony of former business journalists who have become tech reporters out in the Valley in recent months.

This is quite a moment we’re having. It seems like a lot of fun, I hope it lasts forever.

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

What's been said:

Discussions found on the web