Are Unicorns Real? SEC Investigates Tech Startup Valuations

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By Ephrat Livni, Esq. on November 19, 2015 12:04 PM

Technology company startups are drawing regulatory scrutiny after Fidelity Investments reportedly downgraded some of its investments in so-called "unicorns." With companies like Uber collecting billions of dollars before going public -- and investors all hoping to bet on the next big thing -- the Securities and Exchange Commission is getting curious about how the financiers decide what the companies are worth and why the disparity in values.

The reason for this interest? Supposedly, the tech boom is on the wane. According to the Wall Street Journal, the SEC wants to figure out whether the process for valuing large startups is accurate and whether there are procedures in place to ensure fair valuations across companies.

Should You Invest in a Unicorn?

Basically, what everyone is concerned about -- and Fortune is explicitly stating -- is that tech is the next market bubble to burst. Of course, a little regulatory scrutiny does not mean that tech companies will lose their cachet or that they have no actual value.

What the SEC is asking is how that value is determined, what standards mutual funds apply when making the determination, and whether they are evenly applied among companies. The tech valuations are called "unicorns" because -- like unicorns -- they do not reflect reality.

It is unclear to anyone, even serious investors and American regulators, how the figures are reached. Recently, Fidelity has marked down the value of its stakes in unicorns like Snapchat, which was valued at $16 billion, and Dropbox, initially estimated to be worth $10 billion.

What to Do?

"Mutual funds continue to report different prices for the same private companies, and this inconsistency will be a key part of the SEC's close inquiry into this process," Fortune writes.

So what is the average investor supposed to do? Consider this principle, espoused by one of the country's most successful investors, Warren Buffet. "Price is what you pay. Value is what you get."

He suggests putting your money into products you understand. In other words, when mutual funds get excited about Uber and other unicorns, Buffet's Berkshire Hathaway continues to invest in cola and trailers.

If you have questions about investing in the markets, speak to a securities attorney.

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