The art of valuations

Valuations have never been simple. In venture capital, companies are often doing new and unproven things. In buyouts, they may need a full reorganization to unlock value. Even the most road-tested growth equity expansion plan can stall—if a biotech startup’s technology works, it’s the next Moderna; if it doesn’t, it could be worth pennies on the dollar.

But with the rise of retail investors, valuations are now under more scrutiny than ever. These LPs want to know what their portfolios are worth right now, and they expect transparency from their fund manager. This new dynamic requires GPs to find better ways to meet expectations for access to information while educating LPs on how valuations are determined, especially given that estimating a company's value is often more of an art than a science.

Consider the case of a startup that has a major chip manufacturer as its client, bringing in millions of dollars in annual revenue. If that client leaves, the company's assumed value plummets. But what if, six months later, the startup is acquired for $10 million? What is the company truly worth? The answer isn't a single number but a narrative shaped by market events and future potential.

Valuation matters for private market investors for more than curiosity's sake:

• Assessing mid-fund performance: Many funds give LPs the chance to recommit before the current portfolio has matured or exited. Having a credible interim valuation helps investors decide whether to commit to the manager’s next fund.
  

• Informing asset allocation: LPs periodically rebalance their portfolios. But private market assets often take years to reach expected value, making accurate valuations essential to informed allocation decisions.
  

• Responding to emergencies: Whether an LP is a retail investor or a large endowment, unforeseen events can require quick action. Without current valuations, deciding whether to redeem from an interval fund or sell a position on the secondary market (and at what valuation) becomes far more difficult.

In the private markets, most valuations follow the concept of fair value—the price at which an asset would change hands between two market participants, neither under pressure to buy or sell. There are typically three levels of inputs:

1. Direct market prices

2. Observable market data

3. Unobservable inputs (Often defaults to “cost or last round [unless impaired]”)

Valuing early-stage companies, especially pre-revenue ones, is even trickier. Without robust financials, fund managers often rely on qualitative factors that are hard to quantify and inherently speculative, including:

• The founding team’s experience and reputation

• Market opportunity and scalability

• Non-financial milestones such as product performance and adoption, and user growth

• Transactions (investments or acquisitions) of comparable companies

Some managers lean conservative in their valuations, aiming to exceed expectations later. Others are more aggressive, hoping higher numbers will attract new LPs. It’s important for LPs, whether institutional or retail, to understand these biases.

Regardless of approach, investors deserve to know how a value was determined and when it was last updated. Education is critical—especially in explaining that valuations may hold steady for months, then swing sharply in a single day.

The fixation on “unicorn” status—tech companies valued at $1B+—has only amplified the problem, as these headlines pierce the news bubbles of many retail investors. Many past unicorns hit the milestone by applying the latest, highest-priced round's per-share price to all outstanding shares, ignoring the special rights and protections those preferred shares carry. For example, a $5 million investment for 10% of a company suggests a $50 million valuation, but if those shares are preferred stock, the investor actually owns more value than the 10% implies, meaning the true valuation is lower.

This is where LP education and technology matter most. With the right platform, the latest data behind a valuation is always accessible, ensuring GPs and LPs are working from the same facts. The timing of communication matters as well–it should be more often than quarterly, but needs to accommodate legal restrictions as well. In the best case, LPs will be less likely to be blindsided by sudden changes. That matters—especially in an environment where companies like Hinge Health, eToro, Chime, and Circle have gone public at valuations far below their last private round. In Chime’s case, this was less than half its $25 billion peak in 2021. In such a case, GPs should have warned LPs of this possibility, preparing them for liquidity (Yea!) but possibly less than they might have hoped for (Boo!)

Ultimately, valuation isn't just a number—it’s a narrative that shapes LP trust.

Silence leaves room for surprise, and surprise is rarely good news in investing. GPs who proactively explain how valuations are calculated, the assumptions behind them, and the potential triggers for change are the ones that preserve their credibility, avoid reputational damage, and build long-term partnerships with their LPs.