Silicon Valley or Devalued Start-ups?

Mutual funds are cutting down on their investment value in start-up ventures at an alarming rate. This might prove regressive for the nascent companies as this will take the focus away from growth to subsistence. Mutual funds which had set the ball rolling for these start-ups are not only making fewer new investments but could trigger a downward trend already in sight with devaluations and layoffs for the affected companies.

Mutual funds giants like BlackRock Inc., Fidelity Investments, T. Rowe Price Group Inc. and Wellington Management have cut down on their stake value by an average 28 percent in start-ups like Snapchat, note-taking software maker Evernote Inc. and health-insurance brokerage Zenefits.

Lower valuations could spell a doom for most successful companies to raise additional capital at higher 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.

The markdowns left many venture-capital investors in shock. "That level of reporting and transparency has never really been a part of the market, and all of a sudden it came out and it was a shock," said Jeff Richards, a managing partner of GGV Capital, a venture-capital firm based in Menlo Park, California.

GGV owns a stake in Web analytics firm Domo Inc., which has been marked down 16% by Fidelity since August. Fantasy-sports company DraftKings Inc., also partly owned by GGV, tumbled in valuation by an average of 72% in the fourth quarter of 2015.

Mutual funds have to report every month or quarter the estimate worth of each start-up's stocks because shares in private companies aren't traded on a stock market.

The downturn had already set in the second half of 2015. Collapsing tech stocks and the falling market for initial public offerings are now slackening things up that gave 146 venture-capital-backed private companies a valuation of at least $1 billion as of February, up from 45 two years earlier.

Neither the companies nor the funds firm have clarified on the present developments. When analyzing startups, independent valuation committees at fund firms usually sift through financial information from the company and valuations of publicly traded rivals. The committees also look at the share prices paid by investors in previous funding rounds.