Friday Letter: How much is a VC fund really worth?

What is a venture fund worth today? That’s the multimillion-dollar question both LPs and GPs are asking themselves. And it is a question they’ll be asking at least until early next year.

At the moment, there are too many variables and too many things in motion to have any kind of certainty. We will have a much better idea in Q1 2023, when GPs present their LPs with their audited portfolio valuations.

It is an annual occurrence that starts with the CFO of a venture fund sitting down with the fund’s GPs and coming up with a valuation for every company in the portfolio. That information is then given to an auditor, such as Ernst & Young or PricewaterhouseCoopers, that goes through each valuation, adjusting up or down as appropriate, before signing off on the audit.

Until the audit happens, both LPs and GPs can only make educated guesses on net asset values. They are looking at things like 409A filings and new financing rounds, which – based on two high-profile examples – can reverberate in hundreds of funds.

The document known as 409A is filed with the IRS to let it know the fair market value of a particular private company’s stock, as judged by a third-party appraiser. Those filings are where you can see, for example, a substantial decline in the value of payment company Stripe. The business told employees three weeks ago that its internal share price was about $29, down from $40 in its prior 409A valuation, The Wall Street Journal reported.

That means Stripe’s overall valuation dropped by about 28 percent from $95 billion to $74 billion. So, any VC fund with Stripe on its books will have to reflect that change. And that is a heck of a lot of VC funds. PitchBook says Stripe has 91 investors, including Andreessen Horowitz, Atomico, Founders Fund, Sequoia Capital and Union Square, among others.

Investors are also keeping a close eye on how companies’ values go up or down in new financing rounds. For example, payments company Klarna stunned the world last month when it announced that it closed a new financing round that valued the company at $6.7 billion, a massive drop from the $45.6 billion valuation it recorded about a year earlier.

That 85 percent decline is going to sting for Klarna’s backers, which number 127 according to PitchBook. That list includes the aforementioned Atomico and Sequoia, as well as the Canada Pension Plan Investment Board, SoftBank Investment Advisors, Silver Lake and TCV.

There is one other place GPs and LPs can go to get an opinion about the value of their portfolios – the secondary market. It is important to understand that the NAVs being seen in VC secondaries reflect what the buyer is willing to pay right now. Given how valuations of public stocks have plummeted this year, the discount for VC assets can be steep.

Hans Swildens, CEO of Industry Ventures, has been bidding on VC assets since he founded his firm in 2000, so he has seen the market at the highest of highs and lowest of lows. His firm manages both secondary funds and funds of funds, which give it exposure to about 450 venture funds.

“I think all the bids are 40 to 60 percent off, and I know that because I’m bidding,” Swildens told Venture Capital Journal, noting that his estimate is an average and that discount depends on the quality of the asset.

Even on the high end, the bids are coming in at a 25 percent discount. “If the seller gets 75 cents on the dollar, that’s probably in the top 10 percent of bids,” he said. “And then they [the bids] go all the way down to 60 to 70 percent off.”

Mind you, very few LPs are selling VC portfolios at such a steep discount. We’re talking about the value of the bids. Most LPs see the offer and say no thanks. In fact, the volume of VC secondaries deals has declined sharply this year. Industry’s investment pace is about half of what it was in the first six months of last year. “Year over year, cash out the door is probably down 50 percent in Q1 and Q2,” Swildens said. (That includes dollars spent on direct investments as well as secondaries and other deals.)

That said, Industry Ventures has been able to close some deals this year. “We have been buying and we have been buying in the range of 75 cents to 40 cents on the dollar,” Swildens said.

Does that mean the value of your venture portfolio is 40 to 75 percent of what it was a year ago? Only if you have to sell it right at this moment. If you can hang onto the asset for another three to five years, that’s going to give you a bigger number. And if you can hold it for another eight to 10 years, that’s going to be an even bigger number. Heck, if the almost-recession we’re in were to suddenly end and the IPO window was wide open, then you might be able to get 90 cents on the dollar if you had to sell a VC portfolio in the next three months. Then again, if we go into a full-blown recession that takes years to recover from…

In other words, it all depends.