Metrics & Performance
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Quick Answer
The estimated market value of an investment, used by VC funds to mark portfolio companies on their books between financing events.
Fair value is the price at which an asset would change hands between a willing buyer and seller, neither under compulsion to act. For VC funds, fair value accounting (ASC 820 in the US) requires marking portfolio investments to their estimated fair value at each reporting period. Between financing rounds, GPs must estimate fair value using observable inputs when available (recent transactions in similar companies, public market comparables) and unobservable inputs when not (DCF models, revenue multiples). Fair value marks drive the TVPI and NAV calculations that LPs rely on to assess fund performance. The challenge: private market fair values are inherently uncertain estimates until a real transaction crystallizes the actual price. This creates opportunities for both conservative and aggressive marking practices.
In Practice
Summit Ventures invested $3M in CloudTech at a $15M post-money valuation in January 2023. By December 2023, CloudTech hasn't raised additional funding, but comparable SaaS companies are trading at 8x ARR versus the 12x multiple implied in Summit's original investment. Meanwhile, CloudTech grew from $1M to $2.5M ARR but missed its $3M target. Summit's portfolio team assigns a fair value of $18M to CloudTech (down from the $20M implied by the last round), using a blend of comparable company multiples and discounted cash flow analysis.
What good looks like
Why It Matters
Fair value determines how VCs report performance to their LPs and can significantly impact fundraising for subsequent funds. Overstating fair values creates false performance narratives that eventually unwind, damaging LP relationships and making future fundraising difficult. For founders, understanding how VCs mark investments helps explain why some investors become more or less supportive during difficult periods — declining fair values can affect fund dynamics and future investment appetite.
VC Beast Take
Fair value marking has become a delicate art of managed optimism. Most VCs are conservative enough to avoid obvious manipulation but aggressive enough to tell a compelling story to LPs. The real test comes during market downturns when the gap between fair value marks and actual exit values gets exposed, separating disciplined markers from the wishful thinkers.
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Fair value is the price at which an asset would change hands between a willing buyer and seller, neither under compulsion to act. For VC funds, fair value accounting (ASC 820 in the US) requires marking portfolio investments to their estimated fair value at each reporting period.
Understanding Fair Value is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Fair Value falls under the metrics category in venture capital. This area covers concepts related to the quantitative measures used to evaluate fund and company performance.
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