“While many investors and fund managers agree that financial measurements mean little for the first three or so years of a [venture capital] fund,” says the National Venture Capital Association (NVCA) in its Portfolio Company Valuation Guidelines, “after that, the fund wants to communicate progress to the investors. This is where specific valuation rules and processes become more important.” In particular, while portfolio company valuations are “more of an art than a science, especially for pre-revenue and pre-EBITDA companies, “ most limited partner agreements require the venture firm to provide financial statements that comply with GAAP, and since GAAP requires fair value measurements for portfolio positions, “most [funds] must issue financial statements using fair value.”
In its new guidelines, NVCA provides a chronological evolution of valuation in the venture capital industry from 1989 to 2007 as well as its lukewarm support of the Private Equity Industry Guidelines Group (PEIGG). This “self-appointed group of private equity practitioners” originally published its guidelines in 2004, NVCA says, and then revised them in March of this year to comply with SFAS 157. “While the NVCA has not specifically endorsed the PEIGG or other valuation guidelines, the NVCA Board…recommends that its members create, follow, and communicate clearly the specific procedures and methodologies used for valuing their portfolios.” These methodologies should be agreed to by the firm’s investors and conform as required to GAAP and fair value measurements.
Notably, while members are encouraged to review the revised PEIGG guidelines, “[a]s of this writing, neither the NVCA board nor its Research Committee has reviewed this new document. In the coming months we expect the NVCA Research Committee to consider re-supporting the new version of the guidelines.” To read the complete NVCA valuation guidelines, click here.
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