Valuation Methods for Venture Portfolios

· 13 min read
venture-capital finance

If you’ve spent any time in venture capital finance, you’ve wrestled with a deceptively simple question: what is this investment actually worth right now? For public companies, you look at the stock price and move on. For private companies, the answer involves a mix of methodology, judgment, imperfect data, and the occasional philosophical debate. The gap between textbook approaches and real-world practice is worth understanding whether you’re a fund manager, a finance team member, or just someone curious about how the venture sausage gets made.

This post is for informational and educational purposes only. Nothing here is legal, tax, or investment advice. Consult qualified professionals before making any decisions based on this content.

Why Your Last PMV Isn’t Enough

Post-money valuation (PMV) is the simplest number in venture finance. It’s the value of a company after a financing round, and it gives you a quick, defensible data point: if a company just raised at a $200M post-money valuation in an arm’s length transaction, that price is a reasonable basis for fair value.

There are real benefits to this approach. PMV is easy to calculate. Divide by fully diluted shares outstanding and you have a per-share value you can apply to your holdings. And most venture capital valuation policies allow a fund to hold at the latest PMV for up to 12 months after a primary equity financing, which gives you some runway.

The problem comes when time passes.

Imagine a company that raised at a $1 billion post-money valuation during a market upswing, then exits a year later at $400 million after conditions shifted and growth expectations weren’t met. If you’d been carrying that investment at the $1B PMV the whole time, your reported fair value was significantly overstated.

PMV has three core limitations as a standing valuation:

It’s static. PMV doesn’t change until the next financing round. If the market moves, if the company’s performance changes, or if comparable public companies see significant valuation shifts, PMV just sits there.

It lacks depth. PMV doesn’t account for the complexities of a company’s capital structure, its growth trajectory, or broader market dynamics.

It attracts audit scrutiny over time. If your PMV hasn’t changed in 18-24 months, expect auditors to ask for justification that the value is still current and reflective of market conditions.

PMV is a starting point, not an ending point. It answers “what was this company worth when it last raised?” But fair value is supposed to answer “what is this company worth today?” Those are different questions, and the longer the gap between rounds, the more different the answers are likely to be.

Moving Beyond PMV: A Spectrum of Approaches

When PMV isn’t enough, there’s a spectrum of methods to choose from, each with tradeoffs in complexity, cost, and defensibility.

Simple Markups and Markdowns

The most common step beyond PMV is applying percentage adjustments based on changes to the company’s fundamental performance. If the company is growing faster than expected, you mark up. If it’s missing targets, you mark down. The key is consistency: you need to apply similar logic across your portfolio, not just adjust the names that are convenient.

Share Class Allocation

Once you have an equity value from any method, you need to allocate it across share classes. There are two main ways to do this.

Common Stock Equivalent (CSE). This assumes all securities convert to common shares (as they would in an IPO) and values every share at the same price. It’s simple, but it ignores the material economic rights and preferences that different securities carry. In a downside scenario, preferred shareholders have liquidation preferences that make their shares worth more than common. CSE pretends that doesn’t exist.

Waterfall Method (Current Value Method, or CVM). This models the distribution of proceeds in a hypothetical exit scenario, working through the cap table in order of priority and allocating value based on liquidation preferences, participation rights, and conversion mechanics. The CVM is most appropriate when a near-term liquidity event is expected, since it allocates value based on a single exit scenario rather than a probability-weighted range of outcomes. It’s more work, but it produces a more accurate picture of what each share class is actually worth in an exit. The downside is complexity: getting the waterfall right requires a deep understanding of the company’s cap table and all the terms in its financing documents.

Comprehensive Valuations

At the far end of the spectrum, comprehensive valuations use multiple methodologies and synthesize them into a final fair value estimate. These provide the deepest analysis and the most defensible outputs, but they’re time-consuming and resource-intensive. Authoritative guides from organizations like the AICPA and the International Private Equity and Venture Capital Valuation Guidelines (IPEV) provide structured frameworks for these approaches. The gap between what the textbook says and what actually happens in practice is real, though, and worth understanding.

Let’s walk through the three main approaches.

The Market Approach

The Market Approach derives the value of an asset by looking at prices and relevant information from market transactions involving identical or comparable assets. In venture capital, this is the most commonly used approach because, in most cases, you can infer the value of a portfolio company from the activity of similar businesses.

Guideline Public Company Method

You select publicly traded companies that are comparable to the portfolio company being valued, considering factors like industry, size, profitability, and growth potential. Then you apply their trading multiples (adjusted for risk and growth differences) to your portfolio company. Enterprise value to sales (EV/Sales) and EV to gross profit are the most common multiples for venture-backed companies. When growth rates are extreme, growth-adjusted multiples like EV/Sales/Growth can help gauge the relative “cost” of growth.

Selecting the right guideline companies is probably the most important (and most subjective) part of this method. Industry, size, growth trajectory, and risk profile all need to be considered, and the list should be updated regularly as both the public market and the portfolio company evolve.

For early-stage companies, this method can be tricky. Truly comparable public companies may not exist for a pre-revenue startup building something genuinely new, and the adjustments required involve a fair amount of judgment.

Guideline Company Transactions Method

Instead of looking at public company trading multiples, this method examines actual M&A transactions involving comparable private companies. This is useful when there aren’t good public comparables available, but it has a significant drawback: private companies rarely disclose transaction multiples, so the data can be unreliable or simply unavailable. When using transaction multiples, you also need to think about whether the transaction price was influenced by synergies or control premiums that wouldn’t apply to a financial investor’s holding.

Calibration

This is the process of adjusting your valuation assumptions based on recent transactions involving the portfolio company’s own instruments, like a new funding round. Calibration helps make sure your valuation reflects current market conditions and the specific characteristics of the company, and it can be used to align Market Approach assumptions with Income Approach assumptions for consistency.

The Income Approach

The Income Approach estimates the value of an asset based on the present value of its expected future economic benefits. In theory, this makes perfect sense. In practice, it’s less frequently used in venture capital because most portfolio companies don’t have the predictable cash flows that make a discounted cash flow analysis reliable.

Discounted Cash Flow Analysis

You build a financial model projecting the company’s future revenues and expenses, then discount those projected cash flows back to present value using a rate that reflects the risk involved. The challenge in venture is that early-stage projections are often more aspirational than reliable.

The discount rate is where risk gets priced in. Higher perceived risk means a higher discount rate, which means a lower present value. Unlike the Market Approach, which relies on observable market data, the Income Approach requires assumptions about future performance that can’t be directly observed.

Terminal Value

Terminal value represents the value of the company at the end of your forecast period, capturing everything beyond your discrete projections. It’s often a huge component of the total valuation and is calculated using methods like exit multiples or the Gordon growth model. Small changes in the assumptions can swing the total valuation substantially, so terminal period assumptions need careful thought.

The reliability of the Income Approach depends heavily on the quality of the financial projections you’re working with. For early-stage companies, those projections are often speculative – not a criticism of anyone’s forecasting ability, just the reality of trying to project cash flows for a company that’s still figuring out product-market fit.

The Asset Approach

The Asset Approach determines the value of a business by assessing the fair value of its assets minus its liabilities. It’s the most conceptually straightforward of the three approaches and honestly the least commonly used in venture capital.

You estimate the company’s value by calculating the net fair value of its individual assets and liabilities. This is most relevant for companies in capital-intensive industries where tangible assets are the primary source of value. The replacement cost variant estimates what it would cost to acquire a substitute asset of equivalent utility today, adjusted for depreciation and obsolescence.

One thing worth noting: while the Asset Approach focuses on tangible assets, internally developed intangibles like intellectual property or brand value can be significant for early-stage companies. These may not appear on the balance sheet but can represent a meaningful portion of the company’s value.

The Asset Approach works best for capital-intensive companies in very early stages where tangible assets are the main source of value. As companies mature and develop intangible assets and goodwill, it becomes less relevant.

The Role of Secondary Markets in Fair Value

The growth of secondary markets for private company shares has created an interesting problem for venture firms: should those trades factor into how you determine fair value?

The short answer is “maybe.” Fair value under U.S. GAAP is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Secondary market transactions represent actual trades of private company shares between willing buyers and sellers, in theory, exactly what fair value is supposed to capture. In practice, there are enough complications that you can’t just look at the last secondary trade and call it a day.

The AICPA published a working paper addressing this question, focused on stock-based compensation but with implications that extend to venture fund valuations. The key takeaway: firms may need to start formally considering secondary market transactions in their fair value determinations, even if actually incorporating those transactions into the final number represents a high bar.

Not all secondary trades are equally informative about fair value. A few questions worth asking about any given transaction:

Participant type. Was the buyer institutional or retail? Institutional buyers typically have better information and more sophisticated valuation frameworks.

Structure. Was the trade a direct share transfer or through a special purpose vehicle (SPV)? SPV structures can introduce additional costs and complexity that affect pricing.

Share class. Was the trade in preferred shares or common shares? Preferred shares carry economic rights that common shares don’t, so comparing across classes without adjustment is misleading.

Size. Was this a $500K trade or a $5M trade? Larger trades generally involve more diligence and are more likely to reflect considered pricing.

The direction of travel is clear: regulators and standard-setters are paying more attention to secondary markets, and firms that ignore secondary transaction data entirely may face more scrutiny in audits. More liquidity and more pricing data are generally good things for the private markets ecosystem, but the valuation implications are real.

Why Private Market Data Changes the Game

Traditional valuation approaches lean heavily on public market comparables, and while those are useful, they often fall short when you’re trying to capture the true value of a privately held company.

Public companies and venture-backed private companies often behave very differently. Growth rates, risk profiles, capital structures, and competitive dynamics can all diverge substantially. Private market data, actual transaction data from private company financing rounds, gives you a much more direct and granular view of valuation trends for similar companies. When you can see what Series B SaaS companies are actually raising at, across hundreds of transactions, that’s a stronger signal than extrapolating from a handful of public SaaS companies that are ten times larger.

When preparing for period-end valuations, finance teams screen their portfolio to figure out which companies need more detailed valuation work versus which ones can be carried at a simpler estimate. Private market data helps make those decisions better. The key things to look at include transaction volume and frequency in the relevant sector, sector-specific multiple trends, and lifecycle stage, a company in the early post-investment phase and one entering mature growth have very different valuation dynamics.

One of the more practical techniques for incorporating private market data is quartile analysis. Instead of just looking at median valuations, you break the distribution into quartiles and see where your portfolio company falls relative to its peers. Is a company marked in the top quartile but showing middling growth metrics? That’s worth investigating. Is a strong-performing company marked in the bottom quartile? That might indicate undervaluation. Either way, it turns what can be a subjective exercise into something more structured.

Not all private market data is created equal. The most useful datasets have comprehensive coverage across stages and sectors (a handful of cherry-picked data points won’t cut it), historical depth to show how multiples and round sizes have trended over time, and segmentation capability to filter by sector, stage, and geography. A data point about “venture valuations” in aggregate is much less useful than one about “Series C enterprise SaaS valuations in North America.” At Aumni, we were working with data from over 600,000 private market transactions, which gave us the scale to generate statistically meaningful views across most segments of the venture market.

Putting It All Together

Most venture capital funds rely on the Market Approach for the vast majority of their portfolio holdings. It’s the most practical given the available data, and it aligns most naturally with how venture investors think about value. That said, the best finance teams match the approach to the situation:

  • For recently priced investments where the company is performing in line with expectations, PMV is usually fine.
  • As time passes or conditions change, simple markups and markdowns based on company performance give you a quick adjustment.
  • When more rigor is needed, a full market approach analysis with guideline public companies and proper share class allocation provides deeper defensibility.
  • For mature portfolio companies with predictable cash flows, the income approach can add a useful second perspective.
  • Private market data should inform the process at every step, from initial screening to final mark.

The practical workflow for a period-end valuation looks something like this:

  1. Use private market data to screen the portfolio and identify which companies need detailed valuation attention.
  2. Apply quartile analysis to benchmark each company against comparable private companies.
  3. Use transaction trends over time to calibrate your assumptions and adjust for market momentum.
  4. Combine public and private market data to build a more complete picture for each holding.
  5. Allocate equity value across share classes using the waterfall method where it matters.

The goal here is to make sure professional judgment is informed by the best available information, not to replace it with data or methodology. And the biggest challenge has less to do with choosing the right methodology than with making sure the inputs you feed into that methodology are grounded in solid data rather than convenience. The methodology is just the framework. The data quality is what determines whether the output is meaningful.

Further Reading

Some of the data and analysis in this post originally appeared on the Aumni blog, here, here, and here.