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| News & Scoreboards |
No Vindication for Venture Valuations
05/03/2004
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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.”
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