They’re the hottest deals in the venture capital world — startups like Uber and Snapchat owner Snap Inc., whose values soar beyond $1 billion long before going public.
In recent years, there’s been increasing competition to get in on these investments, known as “unicorns,” especially among mutual fund companies looking to gain an edge on investment returns. And according to a paper cowritten by Harvard Business School professor Josh Lerner, Boston’s Fidelity Investments has been the most active fund company in unicorn deals.
“Mutual funds are interesting in the sense that it’s not just some wealthy family or Saudi prince’s money — it’s our money,” said Lerner, who has tracked the venture capital business for 25 years.
He and two colleagues from other schools evaluated 99 big pre-initial public offering deals from 2009 through 2016, looking at 500 total rounds of financing worth $52 billion. Their analysis found that Fidelity participated in 56 rounds from 2009 through 2016. T. Rowe Price was second, at 33, and the Hartford Funds ranked third, at 32.
Other big players included Boston-based Wellington Management Co., an institutional manager that oversees some of Vanguard Group’s mutual funds, and BlackRock Inc., of New York.
Lerner and his colleagues concluded that mutual funds contribute about 20 percent of the total funding for unicorn investments, and that mutual funds’ holdings in such companies have increased dramatically, to more than $10 billion in 2016 from $1 billion in 2009.
While the creation of unicorns has slowed somewhat since 2015, there are 211 of these large private startups in the pipeline globally, with a cumulative valuation of $765 billion, according to Crunchbase Inc., a San Francisco company that tracks venture data.
Companies like Fidelity, T. Rowe, and Wellington “need to participate in these companies while they’re private if they want to be involved in the hyper-growth period,’’ said Kirsten Morin, a senior investment manager in global venture capital at Aberdeen Asset Management in Stamford, Conn.
The flood of money coming from mutual funds, hedge funds, and foreign governments is not always welcome in traditional venture circles. But hot startups are staying private for longer — more than seven years, on average, Morin said — and often need to seek money from nontraditional investors to keep fueling growth.
Uber, the San Francisco ride-hailing company, for instance, has raised $12.9 billion from a range of investors, including Fidelity and Wellington, according to data compiled by The Wall Street Journal. As of the summer, Uber was valued at $68 billion.
While early-stage venture firms can be more receptive to mutual funds’ involvement than later-stage funds, many VC firms that specialize in backing companies from their risky beginnings have launched special funds to compete in later, larger financing rounds, rather than be crowded out by the likes of Fidelity.
But Lerner is critical of mutual funds’ oversight of young companies. They generally don’t take board seats, he said, and can’t monitor a a new company’s progress as closely as traditional venture firms, he said.
He also said mutual funds have to be more concerned with being able to get out of these large private investments if necessary, while venture firms are accustomed to keeping their money locked up for three to seven years.
Fidelity disagrees with that assessment. Spokesman Charles Keller said the company looks to make long-term investments in promising, late-stage startups that appear poised for an IPO, and then to hold those shares for years if the businesses do well.
The firm said it researches startups as rigorously as it investigates public companies.
“We have frequent conversations with the private companies in our portfolios, and we demand quarterly financial statements,’’ Keller said. “After we invest, we treat them like a public company and help them prepare for an eventual IPO.”
Fidelity Investments 56
T. Rowe Price 33
Hartford Funds 32
Principal Funds 21
SOURCE: Sergey Chernenko, Josh Lerner and Yao Ze
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