Moving Beyond Last Price Per Share in VC Fair Value: Easier Said Than Done

For many venture capital funds, valuation has traditionally been relatively straightforward. Either carry the investment at cost, take the last price paid per share and multiply it by the number of shares held, or take the post-money value of the last round and apply a relatively simple waterfall to allocate that value between shareholders.

These approaches are familiar, understandable and, perhaps most importantly, comfortable.

Moving towards a more sophisticated, forward-looking fair value approach, consistent with IPEV, ASC 820 and AICPA guidance, requires more than adopting new valuation methodologies.

It requires a fundamental change in how we think about value. Not so much a technical challenge, but a psychological one.

The comfort of Last Price Per Share

Last Price Per Share provides a reassuring anchor. Someone actually invested money at that price. It's a fact, supported by a transaction.

It also provides a relatively simple answer to a difficult question. There is a price that can be referenced, a calculation that can be repeated and a valuation that is relatively easy to explain.

But that transaction happened in the past.

Since then, the company may have achieved important milestones, missed expectations, changed its business model, improved its prospects or faced new risks. Market conditions may also have changed significantly.

And importantly, the price paid for one class of shares may not represent the value of another class with different economic rights.

A forward-looking fair value assessment asks a different question:

What would a market participant pay for this particular investment today, given everything we now know and reasonably expect?

Or, more simply, if the company were raising a new round of financing today, at what valuation and on what terms would investors be prepared to invest and what does that mean for my shares that would be junior to the theoretical new round?

That question requires us to move beyond a historical reference point and make informed judgments about the future.

The real challenge may be psychological

There is an interesting contradiction in how venture capital firms approach investment decisions and valuations.

When considering a new investment, VCs are comfortable making judgments about an uncertain future. They assess opportunities, challenge assumptions, consider possible outcomes and ultimately decide what they are prepared to pay.

Uncertainty is part of the investment process.

Yet when valuing an existing investment, the instinct can be quite different.

Suddenly, there's a preference for something tangible and verifiable. A historical transaction price feels safer than an estimate based on future expectations. It can seem more objective, more consistent and easier to defend.

And perhaps that's understandable. An investment decision is about taking risk. A reported valuation is about being accountable for a number.

But fair value requires us to bring those two ways of thinking closer together.

It asks us to apply the same forward-looking commercial judgment used when making an investment, while introducing the discipline, documentation and market participant perspective required for financial reporting.

The challenge isn't that VCs don't know how to think about future value. It's that they're accustomed to thinking differently when they're asked to report it.

We're already making these judgments

Perhaps the most interesting aspect of moving towards institutional-quality fair value is that venture capital firms already have much of the expertise required.

Every time a VC considers an investment, the investment team forms a view on the company's prospects, potential outcomes and what it is worth paying.

These are precisely the kinds of judgments that should inform an ongoing fair value assessment.

So why not apply the same principles — and involve the same investment professionals — in the quarterly valuation process?

Of course, fair value must reflect the market participant perspective, rather than simply the investment team's own expectations. But the underlying investment analysis provides an excellent starting point.

The real change is bringing the investment decision-making process into the valuation process.

The rest is largely technical.

Once the commercial judgments have been made, much of the remaining work is technical.

With an accurate cap table, appropriate assumptions and a clear understanding of shareholder rights, methodologies such as OPM and PWERM can be applied through structured workflows and software.

I've discussed these methodologies, calibration and the broader VC fair value workflow in previous posts, so I won't go into the technical details here.

The important point is that the calculations are increasingly manageable. The bigger challenge is changing how we approach the valuation itself.

A different mindset, not an entirely new discipline

Ultimately, moving beyond Last Price Per Share is not about turning venture capital professionals into valuation mathematicians.

It's about connecting two activities that should naturally complement each other: investment decision-making and investment valuation.

The investment team brings its commercial judgment. The valuation function brings the methodology, consistency and governance. Technology supports the calculations, documentation and repeatability.

And the benefits may extend beyond more defensible financial reporting.

A disciplined, forward-looking valuation process can also provide valuable insights for investment and portfolio management decisions.

The technical barriers to institutional-quality fair value are increasingly manageable. But the psychological shift should not be underestimated.

It means moving away from the comfort of historical prices and accepting responsibility for forward-looking judgments, even when those judgments are uncertain and may need to change.

The expertise is often already there. The methodologies are established. And the technology exists to manage much of the complexity.

What's needed is a different mindset — bringing the same forward-looking thinking that VCs already apply when making investment decisions into the valuation of their existing investments.

It's a significant change in approach, but not one that requires an entirely new set of skills.

It's not about reinventing how VCs think about investments. It's about applying that same thinking to how they value them.