Valuation Myths in VC - Part 1: Fair Value Over Cost: Raising the Bar in VC Valuations

This is the first post in our mini-series on valuation myths in venture capital. We’ll explore some of the most common shortcuts used in reporting and why they don’t align with global standards like the International Private Equity and Venture Capital Valuation (IPEV) Guidelines and ASC 820 (Fair Value Measurement under US GAAP).

Let’s start with one of the most persistent misconceptions: using cost as a proxy for fair value.

In venture capital, valuation is more than a technical exercise, it’s about credibility, transparency, and alignment with global standards. Yet one persistent misconception remains: reporting investments at cost. While cost may feel like a convenient anchor, it is not consistent with the International Private Equity and Venture Capital Valuation (IPEV) Guidelines or ASC 820 (Fair Value Measurement under US GAAP).

Cost vs. Fair Value

• Cost is historical. It reflects what you paid at entry.

• Fair value is current. It reflects what market participants would pay today in an orderly transaction.

Both IPEV and ASC 820 are explicit: fair value must be based on market participant assumptions at the measurement date. Cost may only serve as a temporary proxy, and only when no new information has emerged since the transaction.

Why Cost Fails in VC Contexts

Venture-backed companies evolve rapidly. Within months of an investment, a startup may:

• Hit milestones (product launch, revenue traction, regulatory approval)

• Miss targets or pivot strategy

• Raise a new round at a different valuation

• Face shifts in market sentiment or competition

In each case, cost becomes irrelevant. Holding at cost ignores the dynamic nature of venture capital and risks misrepresenting the true economic position.

And importantly, the plethora of down rounds in today’s market provides empirical evidence that valuations can and do drop from the previous round. Relying on cost in such an environment is not conservative - it risks overstating value and misleading stakeholders.

IPEV’s Position

The IPEV Guidelines emphasize that cost is acceptable only as a short-term approximation of fair value. Once new data points exist- whether operational, financial, or market-driven - valuation must be reassessed.

ASC 820’s Perspective

ASC 820 defines fair value as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. It requires consideration of:

• Market conditions

• Observable inputs (e.g., new financing rounds)

• Company-specific performance and risks

ASC 820 explicitly rejects cost as a fair value measure except in rare cases where cost approximates fair value and no better evidence exists.

The Consequences of Using Cost

Persisting with cost as a valuation basis can lead to:

• Misleading reporting: LPs and stakeholders receive an inaccurate picture of portfolio health.

• Compliance risk: Both IPEV and ASC 820 demand fair value, not cost.

• Loss of trust: Transparency is critical in fundraising and investor relations.

Closing Thought

So when you’re thinking about valuation, it can help to keep this in mind: 👉 Cost reflects what you paid at the time. 👉 Fair value reflects what it’s worth today.

Global standards like IPEV and ASC 820 encourage us to focus on fair value, because it gives the clearest picture of where things stand now.