05/03/2004
The National Venture Capital Association (NVCA) has rejected a proposed set of guidelines that would make a portfolio company’s fair value, otherwise known as its market value, the standard used by all venture capital firms in their accounts.
The set of guidelines was recently devised by the Private Equity Industry Guidelines Group (PEIGG), an organization of private equity industry representatives, as a means of providing greater consistency to an industry in which judgment plays a significant role in determining value. As the group points out, “Investors in the same company may have different, but supportable, views on valuation.”
Venture capital firms have traditionally used the amount of money invested in a company as the measure of its value. Known as the cost method, this system of valuation is fraught with potential errors. Poorly performing companies often are not worth the total of the monies invested in them, while booming companies may be worth many times more. For all its imperfections, however, the cost method may be the best option available for valuing early-stage companies that lack any other benchmark.
“The PEIGG guidelines are a great starting point, but they are meant to encompass the total private equity class,” says Jeanne Metzger, NVCA vice president, “including buyout and mezzanine investments, which have benchmarks available. Early-stage venture capital investments do not operate on that same system.”
In its own valuation guidelines, the National Venture Capital Association did recommend to its members that they review the PEIGG guidelines. The NVCA guidelines state that members should “create, follow and communicate clearly the specific procedures and methodologies used for valuing their portfolios.”