Mutual fund managers agree: the value of startup investments are a mystery.

While firms like BlackRock have their holdings in Uber priced to the penny, Fidelity recently valued the same shares 15 percent lower, and Hartford Financial Services Group's figure came in 10 percent lower than BlackRock, the Wall Street Journal reports.

How can that be? Valuation procedures vary from mutual fund to mutual fund, and it's impossible to know which firm is the most accurate, as few share their calculations publicly. Though mutual funds have to assign a price to shares on a daily basis, the lack of public information about private companies makes doing so with precision close to impossible.

Another challenge for valuing startups is the fact that private company valuations really exist only on paper, according to KPMG auditor Sean McKee. "Until you get to a point where there's an IPO, there is no one price," McKee told WSJ. The only regulatory rules for mutual funds valuing startup investments is to not knowingly misrepresent the price of securities.

At least 12 unicorn companies--valued at $1 billion or more--had different valuations from multiple mutual funds on the same day, WSJ found. Katie Reichart, a senior analyst at Morningstar, described the valuation process to WSJ this way: "[Y]ou're kind of getting a guess from the fund company," she said.

So what does this mean for founders in need of capital to grow?  

If highly-regulated mutual funds can't agree on how to value the same companies, it could attract additional scrutiny of the startup valuation process. More skepticism of what many people consider to be grossly inflated valuations could make it harder for entrepreneurs to raise the money they need to grow their companies.

 

Published on: Oct 30, 2015