So over at Techdirt, Mike Masnick gets all whiny about having to follow government regulations:
And, now, FAS 157 has come into play — a new rule impacting many venture capitalists, forcing them to figure out what the “fair market value” of their investments are, and provide that number to their investors. The problem is that these things are impossible to accurately value. Not difficult, but impossible. You’re asking people to value a totally illiquid asset as if it were liquid.
I am sorry but this smells like bullsh*t. Mike claims it is impossible to value a totally illiquid asset.
For arguments sake, lets think of some totally illiquid assets that get valued all the time in the courts:
- A person’s sight (lost in an industrial accident)
- Cancer caused by exposure to a TCE leaching into the water supply
- A person’s life
The fact is that we figure out how to assign a value to “illiquid” assets all the time.
Mike links to Fred Wilson‘s blog post which Mike offers up as “proof” that VCs are complaining about FAS157. However, Fred gives a fairly clear explanation of how his firm tries to value each company, including areas where there is a little bit of black magic. Fred ends his post:
There’s a silver lining in all of this, including the IRS 409a pronouncement of a few years ago that has created a whole industry of private company valuation firms and, if anything, even lower stock option grant prices, and that is that we are starting to collect a huge data set of private company valuations over time.
This, combined with the efforts of a few brave souls to create secondary markets for private company stock is going to lead to more data, more transparency, and more liquidity without having to register and do an IPO or sell your company.
Now I may be insane but Fred doesn’t sound like someone who cannot arrive at any valuation.
Now lets shoot some more holes in Mike’s “theory”. He says that he can possibly value any portfolio companies at any time. This means that, if Mike was to be a member of 5-partner VC firm, his firm could NOT:
- pick the weakest companies that get cut-off (if Mike cannot value a company at all then he can’t value it against another company either)
- decide which partner is doing better and which partner is picking poorly (can’t value, means can’t value partner performance either)
- explain to a limited partner how well the fund is doing (“We can’t value our portfolio companies….” “WTF???” )
- make a decision if the next round should be an up or downround
- figure out if they got a great deal or if the founders got a great deal