Three Ways VCs Value Investments for LPs

Scott Kupor of Andreessen Horowitz has a great post titled When Is a “Mark” Not a Mark talking about a recent WSJ article and the different ways venture capitalists internally value their investments for their investors. One of the biggest challenges being an investor in a private company is that there’s no market to readily sell the shares, thus it’s hard to know the value, and even harder to turn value into cash (ready about the Dry Bubble).

Here are three ways VCs value investments when reporting their data quarterly to the limited partners:

  • Last round valuation/ waterfall — Take the valuation for the last round of financing, take the percent ownership, and report the value of that percent ownership.
  • Comparable company analysis — Take the current metrics of the business (especially revenue), take publicly traded companies that are similar, and base the valuation off those comparables with a ~30% discount for being private
  • Option pricing model (OPM) — Run the different potential exit scenarios through a complicated statistical model (made easy by software) and use the resulting output

Go read When Is a “Mark” Not a Mark and better understand some inner workings of the venture industry.

What else? What are some more thoughts on three ways VCs value investments for LPs?

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