For decades, venture capital has been fairly consistent and conservative when it comes to valuing existing portfolios. Rely on the most recent funding round, either exclusively or as a primary input for the option pricing method.
State of play: Industry standards in 2022 are scattered to the winds.
- Some VC fund managers have aggressively marked down portfolio companies, using public market comps as justification. And that trend could accelerate, given that most VC fund marks are still lagging behind in Q1; the Nasdaq fell 9.1% during that quarter, but has since lost another 22%.
- Other VC fund managers have taken almost indiscernible haircuts, or simply stuck with the “last money in” method.
Why it matters: This is creating added complexity to the jobs of limited partners who are already inundated with a ceaseless stream of new fund PPMs. In short, the apples-to-apples comparisons have rotted.
- Sophisticated LPs are asking more questions, with some telling Axios that they are focusing on cash runway to determine valuation legitimacy. They also are focusing more on qualitative measures than quantitative ones, as the long bull market helped make everyone a winner.
- Plus, larger LPs are likely to have the same asset held by multiple managers.
- Less sophisticated LPs … well, they’re getting what they always get. Easily bamboozled, or convinced that the reporting lag and preference stacks make revaluations irrelevant.
Reminders: This is more of an issue for VC funds than buyout funds, as the latter have long marked the (public) market. It’s also more relevant today than during past public pullbacks, because of mutual fund involvement in growth equity deals (ie, Fidelity, T. Rowe, etc. are marking down).
The bottom line: Objectivity has been replaced by subjectivity when it comes to VC-backed company valuations, even if none of these assets has ever really had a true price.