How Venture Funds Mark Private Holdings (and Why Marks Lag Reality)

Every quarter, venture funds report a value for each company in their portfolio. Those valuations, or "marks", drive the fund's reported performance, influence LP decisions and support future fundraising. But private companies do not have a daily share price, so each mark is an estimate.

Understanding how marks are set, and why they often lag reality, helps LPs interpret fund reports and ask better questions. This guide explains the frameworks, the common methods and the reasons valuations can be out of date.

1. The Rules Behind the Marks

• Fair value accounting. In the US, funds typically report investments at fair value under the accounting standard known as ASC 820, which defines fair value as the price that would be received to sell an asset in an orderly transaction.
• Industry guidelines. Many managers also follow the International Private Equity and Venture Capital Valuation Guidelines, which provide practical guidance on valuing private investments.
• Valuation policies. Each manager should have a written policy explaining how it applies these frameworks.

2. Common Valuation Methods

• Recent financing price. The price of the latest funding round is often the starting point, then adjusted, or "calibrated", for changes since that round.
• Market comparables. Valuation multiples from similar public companies or recent transactions, applied to the company's revenue or other metrics.
• Option pricing and waterfall models, which allocate value between share classes, recognising that preferred shares with liquidation preferences are worth more than common shares.
• Discounted cash flow, used less often for early-stage companies because future cash flows are highly uncertain.
• Write-downs when a company misses milestones, runs short of cash or shows signs of distress.

3. Why Marks Lag Reality

• Anchoring to the last round. Many funds hold a company at its last financing price until a new event, even if conditions have changed.
• Infrequent transactions. Without a new round, there is little hard evidence to justify a change.
• Quarterly and delayed reporting. Reports often arrive weeks or months after the quarter ends.
• Different judgements. Two funds holding the same company can report different values.
• Incentives. Managers raising new funds may be slow to mark down holdings, though good governance and auditors act as checks.
• Preference structures. A headline round price may overstate the value of a particular share class. See liquidation preferences.

After the 2021 peak, many private valuations took time to reflect lower public market multiples, which is one reason LPs now focus on cash returned. See DPI vs. TVPI.

4. How LPs Can Interpret Marks

1. Ask for the valuation policy and how consistently it is applied.
2. Look at the method for major holdings, especially large or unchanged marks.
3. Compare with public comparables and recent market moves.
4. Watch secondary market prices, which can signal whether reported values are realistic. See the LP secondary market.
5. Check the auditor's involvement in reviewing valuations. See operational due diligence.

5. Fund Marks vs. 409A Valuations

Fund marks are different from 409A valuations, which companies obtain to set the exercise price of employee stock options and which typically value common stock rather than preferred. The two can differ significantly for the same company. See choosing a 409A valuation provider.

Frequently Asked Questions

Are venture fund valuations audited?

Annual financial statements are usually audited, and auditors review valuation processes, but individual marks still involve judgement.

Why do two funds value the same company differently?

They may hold different share classes, use different methods or apply different judgements about recent performance.

Should LPs ignore unrealised valuations?

No. They are useful for understanding potential, but should be interpreted alongside cash returned and market signals.

How quickly should marks reflect market changes?

Good practice is to reflect material changes each reporting period, but in practice some marks adjust slowly.

The Bottom Line

Venture fund marks are informed estimates, guided by accounting standards and industry guidelines but shaped by judgement and limited data. They often lag reality, especially when markets move quickly. LPs who understand the methods, ask about major holdings and compare against market signals can interpret fund reports with appropriate confidence.

Global Capital Network connects LPs and fund managers through our events and investor network. Get in touch to learn more.

This article is general information, not accounting or investment advice.