What If Fair Value Could Actually Help Improve Fund Returns?

Sounds like a crazy idea.

Most VCs view fair value as a reporting exercise.

Something the finance team does every quarter to produce NAV, satisfy auditors, and meet LP reporting requirements.

But what if that's not the whole story?

What if the biggest opportunity in IPEV and ASC 820 has very little to do with reporting at all? 

Most venture firms  track KPIs and review portfolio company performance every quarter.

Revenue growth.

Customer additions.

Burn.

Cash runway.

Hiring.

Product releases.

The problem is that quarterly KPIs can be surprisingly misleading when viewed in isolation.

A company can hit every metric in the board deck and still be moving further away from the venture-scale outcome that justified the investment.

Equally, a company can miss short-term targets while becoming significantly more likely to achieve a very large exit.

Why?

Because operational progress and “valuation creation” progress are not necessarily the same thing.

Management team can boost short-term revenue by targeting easier, lower-value customers while weakening its long-term competitive position.

Another company may deliberately sacrifice current growth, invest heavily in product or market expansion, and materially improve its chances of becoming a category leader.

The question isn't whether something changed.

The question is whether what changed affects the Probability, Timing or Size of the Expected Exit (PTSE).

And that's where I think venture firms may be overlooking one of the most valuable aspects of fair value.

At the heart of IPEV and ASC 820 sit two concepts:

✅ Milestones

✅ Calibration

When a VC invests, there is an investment thesis.

The company is expected to achieve specific milestones relating to product development, customer adoption, revenue growth, market position, financing and execution.

Those milestones support assumptions about the company's future exit:

• How likely it is

• When it might happen

• How large it could be

The price paid for the investment reflects those assumptions.

That is calibration.

Most firms do not formally revisit those assumptions every quarter.

Instead, they often focus on whether this quarter was good or bad.

Calibration requires a different mindset.

It asks:

Compared to the assumptions that justified the original investment, what has changed?

Which milestones were achieved?

Which were missed?

Were they achieved earlier or later than expected?

Has the market changed?

Has competition changed?

Has the company's ability to execute changed?

And most importantly:

Does any of this alter the Probability, Timing or Size of the Expected Exit?

That is a very different conversation from a typical KPI review.

It forces investors to evaluate progress against the original investment thesis rather than against a standalone quarterly scorecard.

Viewed this way, the fair value process becomes far more than a quarterly reporting exercise.

It becomes a structured framework for repeatedly challenging investment assumptions.

For separating meaningful investment progress from short-term operating noise.

For identifying companies that deserve more capital.

For identifying companies that may require strategic changes.

For recognising when a business may still be good, but is becoming less likely to generate a VC-scale return.

And perhaps most importantly, for avoiding the trap of allocating capital based on past investment rather than future opportunity.

Ironically, most firms think about IPEV and ASC 820 as reporting frameworks.

But perhaps they should also be viewed as portfolio management frameworks.

A disciplined milestones and calibration process forces investors to continually ask:

Are we becoming more or less likely to achieve the exit outcome we originally underwrote?

That's not a valuation question.

That's an investment question.

And if answering that question consistently leads to better capital allocation decisions across the portfolio, perhaps the fair value process can contribute to something much more important than NAV reporting:

Better investment decisions. Better exits. And potentially better fund returns.

Wouldn't it be ironic if following IPEV and ASC 820 actually helped improve IRR?