Mutual Funds Curtailing Investments in Start-Ups

Rolfe Winkler and Scott Austin reported on the front page of today’s Wall Street Journal that, “Mutual funds that helped fuel the technology boom are cutting the value of their startup investments at an accelerating pace and are making fewer new investments.

These are ominous signs for Silicon Valley, where a flood of money into young companies pushed valuations skyward, and subsidized hiring sprees and advertising binges at scores of companies.

“The mutual-fund pullback threatens to deepen a wider downturn that has already led to falling valuations, shrinking ambitions and layoffs as the receding tide of capital forces startup companies of all kinds to focus on the bottom line rather than growth at any cost.”

(In a related item, The Wall Street Journal Online today included an interactive “Startup Stock Tracker” graphic at the paper’s webpage).

The Journal writers explained that, “The markdowns have stunned many venture-capital investors and blindsided some executives at startups.

“Lower valuations by mutual funds could make it harder for all but the most successful companies to raise additional capital at richer prices and lead to more funding rounds at lower valuations. That can sap employee morale and hurt efforts to lure new hires with stock options.”

Today’s article also stated that: “Many Americans own a piece of private technology companies through their mutual funds. Last year, about 45% of the funding rounds that valued a U.S.-based, venture-backed startup at $1 billion or more included a mutual fund, according to securities filings and data from Dow Jones VentureSource.”

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