Why Early‑Stage Valuation Is Really About Optionality

Over the past few posts, I’ve been unpacking fair value methodologies under IPEV and ASC 820 and how they apply to venture investments. Now feels like the right moment to zoom out and ask the bigger question: what is a company actually worth?

More specifically, how should we think about enterprise value across different parts of the investment universe?

In public markets and traditional private equity, the answer is almost comfortingly straightforward. These companies typically have:

• Revenue

• Operating history

• Customers

• Market share

• Brand equity and goodwill

• And sometimes even profits

With that foundation, valuation becomes a largely mechanical exercise: applying trading multiples, precedent transactions, historical comps, growth‑to‑earnings relationships, and discounted cash flow models. The logic is grounded in observable performance and a functioning market.

Early‑stage venture companies live in a completely different reality.

Most have:

• No revenue

• No profits

• No market share

• No brand

• No track record

• No tangible assets

• No goodwill

Trying to apply traditional valuation frameworks here is like trying to price a field based on how much wheat it might produce someday. You simply don’t know:

• whether the soil is fertile

• whether the weather will cooperate

• whether pests will arrive

• whether the farmer will run out of money

• or even whether wheat is the right crop

Yet investors are still asked to put a price on that field today.

And that’s the essence of venture valuation: you’re not valuing what exists — you’re valuing what could exist, and the probability that it will.

The Role of Valuation Professionals

In public markets, thousands of analysts publish valuation reports daily. That ecosystem doesn’t exist in venture, largely because early‑stage companies lack the fundamentals required for traditional analysis. As a result, venture funds need to build their own internal processes to determine enterprise value – best done through calibration – which will be covered in a separate post.

Liquidity: The Great Divider

Public and mature private companies are tradable. Their shares have a market. They have a value today.

Early‑stage venture companies do not.

Their value is tied almost entirely to a future event — a financing, an exit, or some liquidity milestone that may or may not occur. Investors aren’t buying a slice of current enterprise value; they’re buying a call option on potential future value.

This creates a fundamental distinction:

Public/Private Equity Valuation: What is the company worth today?

Venture Capital Valuation: How close is the company to a major value‑creating event?

Put differently:

VC valuation isn’t about enterprise value today — it’s about optionality on enterprise value tomorrow.

This is why fair value for venture type investments, under IPEV and ASC 820, becomes so nuanced, you’re valuing a probability‑weighted future, layered with optionality and filtered through a complex capital structure, in a market where liquidity may be years away.

And that’s exactly what makes venture investing both challenging and fascinating. You’re not pricing the house, you’re pricing the field, the weather, the seeds, the farmer, and the chance that one day the harvest will be extraordinary.