Armageddon will have to wait

Fidelity Investments recently marked down the valuations of some of the highest-flying unicorns in its portfolio. Not surprisingly, the news stoked the current narrative that the market for late-stage venture-backed companies is falling apart. A look at two different sets of numbers tells a different story.

More companies rising than falling

First, based on the Startup Stock Tracker data from the Wall Street Journal, the internal rate of return (a measure of investment profit) for investments in companies on this list – primarily unicorns – is a very respectable 17.5%.

How do you get to that number? About 30% of these companies have a fair market value below the initial investment cost from the respective investors. The average writedown from the initial investment in this group is 25%. At the same time, 70% of companies on the list are above the initial investment cost. The average increase in this group is 81%.

So as of March 31 2016, the total performance of these investments is 1.4 times the initial cost, and based on the reported initial investment date, that is a 17.5% annualised rate of return.

What investor would not be interested in this kind of performance?

Capital is not drying up

Second, capital has not stopped flowing to late-stage venture capital companies.

In fact, capital inflows in mega-rounds – those financings of $100m or more – were at an all-time high in the first quarter of 2016. As of March 31, early PitchBook data covering companies with US locations shows that in the first quarter about $8.8bn was invested in these mega-rounds across 23 companies. That is up from $6bn in 21 companies in the previous quarter.

This increase represents an annualised investment level of $35bn for 2016, up from $26bn in 2015 and $16.7bn in 2014.

In truth, Armageddon for this asset class will have to wait.

This is an edited version of an article first published by Pitchbook