VCs still view valuation as ‘necessary evil’

BVWireIssue #66-1
March 5, 2008

During last week’s meeting of Venture Capital in the Rockies (VCiR), attendees from Arcstone Partners (Denver, CO) reported on the content and conversational tone of the meetings.  Overall attendance at the event, held at the Beaver Creek ski resort, was at record levels, with 326 pre-registrants and a number of “walk-ins” paying cash at the door. The hallway “chatter” or tone was good, says Chuck Reed, Arcstone’s director of valuation services.  If there is any impact from the ongoing credit crunch in public markets, venture capitalists either aren’t feeling it yet—“or they are excellent actors,” he says.  “There are also no hints that portfolios are being reviewed for underperforming assets with any greater vigor than has been exercised in the past.”

However, in general, the VC community still views valuation as a “necessary evil that they are reluctant to pay for,” Reed observes.  Those in the Rocky Mountain region complain that Silicon Valley VCs are driving valuation prices higher.  At lunch, the topic of greatest interest was “Valuation Doesn’t Matter”—a tongue-in-cheek presentation on why a higher valuation is actually desirable in many instances.  Views on valuation also depend on whom you ask, according to Arcstone managing director, Bo Brustkern.  “More to the point, it depends on the auditor you ask.  At VCiR we heard a range of perspectives (relating to common stock valuations, purchase [delete the d!] price allocations and portfolio valuations), from ‘you're a bunch of bloodsucking leeches’ to ‘we take this stuff seriously and act in full compliance wherever required.’" 

Notably, the interpretation of "wherever required" may vary significantly based on how hard certain auditors are pushing regulatory compliance.  One private equity CFO offered an illustrative anecdote.  Last November, his auditors made it clear that his portfolio could be valued using the old-school PEIGG standards of value.  “Business as usual,” Brustkern says, “no surprises.”  Then just this past February, the very same auditors said the PE firm's portfolio would have to be valued according to the Fair Value standard.  “Needless to say, this caused our friend a tremendous amount of heartburn, and he is [right now] working through the issues.”  Brustkern would be surprised if this was an isolated incident.  “It’s very clear that strict adherence to Fair Value standards is not at all uniform across the PE, VC and tech industries.  It all comes down to the auditor at this point, and adherence is all over the road.”

Adding to the positive notes, “Judging from the number of potential investors speaking with management teams after presentations,” Reed says, “the private equity segment of the economy continues to be healthy and should ensure continued work for valuation professionals.”  Visit the VCiR website for more details on this year’s conference.

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