A recent trend has taken Silicon Valley by storm: the unicorns. Defined as a startup valued at $1 billion or more before going IPO, the unicorns usually see tremendous growth rates while transforming industries. Snapchat, Uber, Airbnb, Pinterest, SpaceX and Spotify are all examples of the $1 billion club, and some of those companies are valued much more than dozens of publicly traded tech firms.
For instance, Uber’s latest fund raising valued the company at $62.5 billion, which is more than Pandora (P, Financial), Twitter (TWTR, Financial) and Yahoo! (YHOO, Financial).
Combined.
Hunger for access to these startup firms has made fundraising crowded affairs, and some startups complain about being harassed by hedge funds, private equity firms and investment banks to take their money.
How to get in
Obviously, getting into the startup game can be extremely lucrative. But unless you have access to millions of dollars and special connections, getting in is tough.
Unless, of course, you own stock in GSV Capital (GSVC, Financial). One of the original tech-focused private equity firms, GSV Capital went public in 2011 and gave investors an opportunity to jump into the startup world. The company is heavily invested in many private tech startups, like Spotify, Coursera, Dropbox, PayNearMe and Lyft. However, it also has significant ownership in some late-stage tech firms that have already gone public like Twitter.
GSV Capital has democratized access to the tech startup world. So is this your key to get where the action is and make a ton of money?
Not exactly.
You can, but should you?
Just because you can run into the arms of the tech private equity world doesn’t mean you should. The sector has struggled recently, but more of a concern is that GSV Capital has struggled for years.
First, let’s look at tech. Several startups are suffering valuation write-downs, including major holdings for GSV Capital like Dropbox. These writedowns can cause a startup’s fair market value to fall by billions of dollars, and many analysts expect more writedowns to come. The problem, as some see it, is that these companies got too much money in their early stages, and growing valuations from that high watermark is pretty much impossible. Big investment firms like T. Rowe Price and GSV Capital shareholders end up holding the bag.
The share issuance problem
GSV Capital has been holding the bag for years, sadly. The company’s net asset value fell 6.3% on a year-over-year basis in the last quarter of 2015, and net asset per share is down about 10% from 2011. The company has grown its total assets by nearly 300% in that time, but more share issuances has diluted shareholder value significantly. In 2011, there were 5.5 million shares; in late 2015, there were 19.3 million shares.
This is the problem with a financial intermediary like GSV Capital. While you are in fact investing in these startups, GSV Capital can leverage your investment further and dilute your ownership to raise cash and fund further investments. While this can be good for broader company growth in the long term (which helps management earn more since it's paid a fee based on net assets), it also means that tremendous growth in valuations doesn’t materialize for shareholders, at least until management stops buying shares.
Sadly, that doesn’t seem to be in the cards any time soon.
