On Valuing Imaginary Money

If you’re not deeply involved in venture capital, there are three important things to understand:

  1. The best way to measure the performance of a venture fund is its cash returns. The problem, however, is that cash returns can take years to appear if they appear at all.
  2. In order to track the performance of a venture fund before it matures, the vast majority of funds are required to estimate the current value of their portfolio on a quarterly basis.
  3. As a general rule of thumb, the value of a portfolio company is either marked-down to $0 if they’ve failed or marked-up to the value of their most recent fundraising. In between those two cases (failure vs. future funding), there’s an especially wide gray area.

That gray area can result in somewhat-sensational tweets. If you’re putting an estimated value to portfolios and releasing that information to the general public, there ought to be a responsibility to include the methods used to value the underlying portfolio. Otherwise, you risk ending up with sensational headlines that aren’t exactly a lie but aren’t exactly the truth.