It’s been nearly 20 years since the Financial Accounting Standards Board (originally FAS 157, now ASC 820) and the International Accounting Standards Board (IFRS 13) clarified, and largely aligned, the valuation standards required for investment managers to employ when determining the fair values of their investments. Despite the common definition of Fair Value (“the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”), the guidance provided in “how” to determine fair value provides latitude for asset managers to impart their judgement in the valuation process.

Focusing on non-traded, illiquid assets, the lack of active market prices results in judgement playing a meaningful role in the valuation process – from the selection of valuation methodologies to the determination of individual inputs used in valuation models.

Even within the spectrum of illiquid assets, all are not “created equal” from a valuation perspective. The methodologies and inputs for the valuation of private credit has been more or less “standardized,” while those for private equity and especially venture capital (VC) have not. Information rights, investment structure, and a manager’s value creation plan all play meaningful roles in the valuation process.

Recent History in VC Valuation

Following the Global Financial Crisis beginning in 2007, interest rates remained at historic lows through the end of 2022. Concurrently, public equity markets had a nearly uninterrupted run up in value through the end of 2022. These market conditions were a boon to the VC industry as unprecedented capital flowed into the space.

Interest Rates and Venture Capital Funds Raised 2015 to 2024

*[1] Source: PitchBook, NVCA Venture Monitor, Q1 2025

[2] Annual average based on daily observations from macrotrends.net

Plentiful capital buoyed the industry, and that meant that VC’s valuation processes were able to rely primarily on indications of value resulting from frequent, new financing rounds, lessening VCs’ need to develop more robust valuation models that required the application of judgement. This worked for the industry (VC managers, auditors, investors) until it didn’t.

The Peak of the Market

January 3, 2022, was the peak of the public equity market (S&P 500 used as a proxy), and interest rates closed out 2021 at or around historic lows as well. Through 2022, the equity markets declined (the S&P 500 was down approximately 25% through mid-October 2022), and interest rates progressively increased as the Fed fought to get inflation in check. Higher interest rates and the declining equity markets led to a dramatic drop in VC funds raised in 2023, and those funds peaked at $190 billion the prior year. As a result, the frequent, new rounds of financing that simplified VCs’ valuation processes all but dried up.

In hindsight, most VCs did not change their valuation process from “the last round” used “last quarter” in the hopes that market conditions were “transitory.” Similar to the Fed’s view on inflation, the reality played out quite differently.

Auditors Rejecting VC Valuations

Fast forward to early 2023, and auditors were rejecting valuations – even those supported by some independent, third-party valuation firms – because the valuations lacked consideration for company specific events, the realities of the financial markets, or the shortening cash runways at portfolio companies.

Increasingly, as time wore on, LPs took note that VC investments were their best performing assets with little/no losses in an otherwise challenging market, raising more and more questions about the goodness of the underlying VC’s valuation processes – from valuation policies through valuation committees.

While the last round of financing for a company can be a great indication of value, the longer a company goes without a new round of funding, the less reliable a prior indication of value becomes. The longer the clock ticks without new funding could (though not always) indicate that the company is not meeting its milestones or KPIs. If the company is pre-revenue or not break even yet, the more time between rounds, the shorter the cash runway gets.

Recent Regulatory Review

In March 2025, the United Kingdom’s (U.K.) Financial Conduct Authority (FCA) published its “Review of Private Market Valuation Practices.” In the U.K., the FCA plays a role similar to the SEC in the United States, as both are financial regulators with broad mandates including maintaining market integrity. The FCA’s review included U.K.-based private asset managers, including VC managers. While the FCA review was limited to U.K.-based asset management firms, its conclusions would also likely apply to other jurisdictions, including the U.S.

The FCA concluded that “Robust valuation processes were those that could evidence independence, expertise, transparency and consistency.” While many firms attempted to appropriately estimate and report fair value estimates, the FCA’s review indicated that there was room for improvement across the industry. The FCA encouraged firms to make improvements in governance, addressing of conflicts, documentation, and processes for valuation. The FCA also noted the need for functional independence in the valuation process, which can be enhanced by engaging a third-party valuation adviser.

Challenges in Valuing Venture Capital Investments

Getting the information needed to value VC investments can be one of a GP’s biggest challenges: they may have hundreds of portfolio companies, the portfolio companies have limited resources for investor reporting (GPs don’t want to distract the key individuals from pursuing commercialization), and, given the portfolio companies’ stages of development, there may not be much to report.

GPs need to consider how best to value each individual company while considering what other data to incorporate into their valuation analyses. With recent advances in technology for portfolio management, Workflow tools like Stout’s AphaPipe can help to streamline and manage the process.

Information Rights and Valuation

Information rights are generally very different in the VC space than in traditional private equity and/or private credit. In the private equity world, investors (especially control investors) can have unlimited access to data, including value drivers and defined KPIs that are provided monthly or quarterly in nicely formatted reporting packages.

With VC investments, however, the information available to investors, most of whom are minority investors, is usually more limited and can be limited to a handful of data points provided quarterly, or even less. Further, some of the inputs would not “typically” be viewed as inputs to a “typical” valuation model. VCs are often sensitive about asking their portfolio companies for detailed reporting packages, preferring to allow the companies to work toward reaching their potential.

Information rights can also vary among different investors in the same company, as larger investors in VC (and in private equity) will usually have a seat on the company’s board of directors, giving them nearly unrestricted access to any information needed to form a view on valuation. For smaller investors, however, the portfolio company may not have any obligation to provide any information making the valuation process more challenging.

The disparity in information rights noted above often leads to disparities in co-investors’ fair value determinations for the same asset, and those differences can, at times, be meaningful. Assuming investors are using information that is known or knowable to them, meaningfully different valuations can not only be well documented, but also supportable.

Market participant views can also vary, impacting valuation opinions. Venture investments also tend to have more complex capital structures with different rights and terms for investors at each level of the waterfall. It’s possible for two investors with the same view on a portfolio company’s enterprise value to have a very different view on the value of their investment given the terms of the security in which they invested.

Value Disparities

Value disparities continue to exist when third-party valuation firms are valuing or reviewing portfolio company valuations. Since a valuation firm working on behalf of a fund can only use the information provided by their client, the independent valuation firm may produce different valuations for the same investment across their clients. If the data provided by clients vary, it may be challenging for the independent valuation firm to reconcile the valuation differences while respecting the confidentiality agreements with their clients.

Valuations Over Time

Value can be created in both smooth and/or “step functions.” A fintech company may slowly create value as they get customers signed up to their service, while a biotech firm may accrete value in more discrete steps as their product moves through the stages of regulatory approval. That being said, when an LP sees that a GP’s NAV has not moved in several quarters, it is reasonable to expect that an increasing number of questions will arise, as it is unlikely for “winners” to exactly offset “losers” in the portfolio for multiple quarters, resulting in a flat NAV.

While a VC-backed portfolio company may be pre-revenue, the portfolio company can still be making progress toward achieving milestones. For example, in the biotech space, the milestones can be easily identified, usually being tied to the regulatory approval process and ultimate commercialization.

Lastly, the use of various market inputs varies widely within the VC community. Whether one considers the use of “comparable” or “guideline” companies will vary widely despite giving a window as to current market conditions within a given sector.

Further, some GPs may consider the development of the company when they consider whether to value their investment on an “as converted basis.” The reality is that such a decision should be made in conjunction with the market reality – is the IPO window open, or more specifically, is the IPO window in that specific sector open? If the likelihood of an IPO is low given market conditions, likely an “as converted” assumption should not be heavily weighted in a valuation analysis at that measurement date.

Lastly, there are firms collecting secondary market trade data that may be considered in a GP’s valuation analysis – the quality and timeliness of the information may vary.

While VCs often lack the typical portfolio company specific valuation drivers (e.g., revenue, EBITDA, or detailed financial forecasts) and are constrained by limited public market data for benchmarking, valuation determinations must still be made. It is therefore best practice to establish a valuation model at the time of the investment to track milestones and calibrate the valuation model to original expectations.

Reporting at “cost” or the last round of financing isn’t necessarily the wrong answer for a valuation, but a concluded fair value estimate must be supported by both developments (positive or negative) at the portfolio company level as well as the realities of the financial markets at each valuation/measurement date. It is important to remember the requirement to use market participant assumptions when reporting assets at Fair Value and that a GP’s or fund’s valuation policy should not conflict with the accounting rules.

409a Valuations and VC Fund Investing

As a shortcut for determining fair value, some fund managers might rely on 409a valuations for the fund’s reporting of investment value. These valuations are prepared to value the company’s stock in connection with the issuance of stock options or other securities to employees. Since a 409a valuation is prepared for a different purpose (tax) and often omits considerations for market changes and calibration (as required by ASC 820), these valuations are generally not appropriate for financial reporting. Moreover, the VC fund investor likely holds a different security with preferences not considered in the valuation of common stock determined under Section 409a.

The Auditors’ Influence

Auditors are often viewed as the independent purveyors of quality and consistency. Unfortunately, while the quality of a given audit may be high, audit practices often are focused on the audit team level and don’t incorporate input from the broader audit firm – similar confidentiality restrictions exist between auditors and their clients. Audit conclusions aren’t necessarily shared among audit teams, never mind within a given audit firm nor across audit firms, limiting auditors’ ability to bring consistency to an inconsistent world.

Further, all audit firms (and/or teams) are not created equally – valuation support (internal or third party) that may satisfy one audit partner may not satisfy another. While the fund’s auditor may not be able to ensure consistency of the fair values of their clients for a given investment, they can be a very good resource to assist the fund in forming a good valuation policy as well as to inform the fund about their expectations on data, analytics, and support of portfolio company valuations as it pertains to their audit procedures. An ounce of prevention can contribute to a smoother audit process as well as a better valuation outcome.

Process and policy are important for valuation, and both should be established at the fund’s onset and consistently followed. As portfolio companies and markets change over time, valuation processes should reflect these changes. A fund’s valuation policy should be revisited periodically (e.g., once a year to be in line with best practices) to ensure that it remains current and relevant given evolving valuation best practices. Limited information rights may limit the valuation methodologies that may be considered at a point in time, but that doesn’t mean that one can’t document why – or why not – certain methodologies were employed given the information available from the portfolio company and/or the market.

What Investors Want

Over the past year, at our quarterly LP valuation round tables, Stout has received many questions from LPs on the valuation practices of funds. Our impression had been that most questions focused on valuation practices in the VC community.

To be more scientific, in Stout’s most recent round table meeting of LP operational due diligence professionals, we polled our audience, asking, “Which private asset class had the most reliable valuations?” Attendee responses were almost evenly split among private equity, private credit, and real estate. Notable was the fact that venture capital received zero votes for the most reliable valuations, confirming our prior perception that investors have a lot of questions relating to the current state of VC valuations and that there is a need for improvement.  

Investors Delving Into VC Valuations

Increasingly, fund investors are looking more deeply into VC’s valuation policies and procedures, including speaking with experienced valuation professionals to understand the state of the possible and current best practices. GPs may find that LPs’ investment teams may be okay with marking investments at cost until realized or written off, but LPs’ operational due diligence and accounting teams require VCs to robustly determine the fair values of their portfolio companies. Otherwise, they cannot effectively do their jobs – or may veto investments in VCs whose valuation processes are not consistent with best practices in the VC community.

Conclusion

The valuation of VC investments requires specialized knowledge, especially given the challenges faced when information to leverage during the valuation process may be lacking. While early and growth stage investments may be incrementally challenging to value, developing a consistent valuation policy and valuation procedures and documentation contribute to a robust and repeatable valuation process.

At Stout, we work with our clients to help manage the various complexities inherent in the valuation process. Reach out if you would like to learn more and to get a demonstration of our industry-leading technology to efficiently collect pertinent information from portfolio companies on a periodic basis.