Valuing a venture capital fund’s portfolio presents challenges for many fund managers. Most investments are privately held, have limited financial history, and may pivot business models multiple times. Because of this, fund managers mark to market during the early stage of the investment which can present challenges as investments mature and auditors require detailed reports to support valuations.
Unlike hedge funds that mark portfolios to market daily, VC managers typically value their holdings quarterly with far less data. This makes valuing portfolio companies relatively subjective as fund managers must rely on discounted cash flows or comparative company analysis to derive a value.
Valuations can be one of the most challenging aspects of running a venture capital fund.
Common Valuation Challenges for Venture Capital Managers
Valuing early-stage companies is challenging. Unlike late-stage companies, start-ups typically lack consistent financial metrics such as revenue, profits or EBITDA that serve as reliable valuation benchmarks. As a result, venture capital managers rely on discounted cash flow analysis or comparable company valuations introducing subjectivity into the process.
Shifting market conditions can also introduce valuation challenges. The market corrections in 2022 and 2023 are prime examples of how quickly shifting macroeconomic factors like rising interest rates, trade policy changes and geopolitical instability can impact portfolio company valuations.
Audits add another layer of complexity. At year-end, VC managers need to be prepared to defend their valuation methodologies with auditors. Keeping detailed documentation and applying consistent processes are essential yet can be overwhelming for firms with competing priorities.
Given the complexity and scrutiny surrounding valuations, many VC managers are turning to experienced management company accounting service providers for support.
How Management Company Accounting Providers Can Help
An experienced management company accounting provider brings structure and expertise to the valuation process by helping VC managers build consistent valuation processes. Here are four ways they help VC managers navigate the process more effectively.
- Build a Consistent Valuation Framework: A management company accounting provider will help develop methodologies the firm will use to determine the basis for fair value and ensure that it is applied consistently across time periods. They’ll also prepare detailed documentation explaining the valuation process which will be helpful during the annual audit and in responding to due diligence requests.
- Centralize and Standardize Data: Management company accounting providers also play a strategic role in gathering and standardizing data. They consolidate financials, cap tables, and key performance metrics so managers can make better, data-informed decisions.
- Support Valuation Committees: Many VC firms use internal valuation committees to review and approve valuations. The management company accounting provider will prepare background analysis and documentation to support the discussion and be available to answer questions.
- Streamline Audit Preparation: A management company accounting provider prepares the VC manager for the annual audit by anticipating questions and preparing supporting schedules. This reduces surprises and keeps the process moving along smoothly.
Why Venture Capital Managers Choose VIRIDIS
Our accounting team has decades of private fund accounting experience and understands the operational demands venture capital managers face, especially when it comes to valuations. Having first-hand experience working with managers in preparing valuations for early-stage companies, our team can act as a sounding board to managers’ finance teams, establishing processes and creating standardized templates and schedules to maintain documentation that satisfies auditors and LPs.
Our team has the experience and knowledge to offer the operational support and discipline that many growing VC fund managers need as they scale their business. Please get in touch with Josh Heching with questions about VIRIDIS’ management company accounting services.