When a venture fund reports that your company is worth $200 million in its quarterly LP update, that number is an estimate built on assumptions — not a market price. Gurpreet S. Bal has worked through enough fund audits and LP disputes to have a clear view of how these marks are made: "A valuation in a venture fund is a story the fund tells its LPs. The story has to be internally consistent and defensible on audit. Whether it reflects what the company would actually sell for is a separate question entirely."
Understanding the mechanics of fair value measurement is increasingly important for both founders and LPs as the gap between paper marks and exit reality has widened across the venture market.
Under US GAAP, venture funds are required to measure their investments at fair value under ASC 820. Fair value is defined as the price you would receive to sell an asset in an orderly transaction between market participants at the measurement date. This is a hypothetical — there is no actual transaction. The standard establishes a three-level hierarchy: Level 1 is observable market prices (publicly traded securities); Level 2 is inputs derived from observable data; Level 3 is unobservable inputs, meaning the fund's own assumptions. Almost every private venture investment is a Level 3 asset. That means the fund itself — with some auditor oversight — is the primary arbiter of what the position is worth. Gurpreet Bal advises LPs to pay close attention to valuation methodology disclosures in audited financial statements, because the methodology tells you more than the number does.
The International Private Equity and Venture Capital Valuation Guidelines (IPEV) are the industry standard for how GPs apply ASC 820 in practice. IPEV emphasizes calibration: when a new investment is made, the transaction price is presumed to represent fair value. In subsequent quarters, the GP must calibrate — meaning it must assess whether circumstances have changed enough to justify a deviation from the initial transaction price. Revenue growth, market comparables, a new financing round, or deteriorating business fundamentals are all inputs. The IPEV framework gives GPs meaningful discretion, but it also creates an audit trail. If a fund marks a company up without a new financing event, it needs to be able to justify that decision against observable inputs.
The two most common techniques for valuing venture-stage companies are the Option Pricing Model (OPM) and the Probability-Weighted Expected Return Method (PWERM). OPM treats each class of equity as a call option on the company's total value, which is useful when a company has complex capital structures with liquidation preferences. PWERM explicitly models multiple exit scenarios — IPO, acquisition, continued operation, dissolution — and weights each by probability. Both methods require significant assumptions. In the OPM, volatility inputs have an outsized effect on the result and are themselves estimated from comparable public companies. In the PWERM, the scenario probabilities are the GP's judgment. A fund can produce markedly different valuations from the same financial data depending on which method it uses and how it calibrates the inputs. Year-end audit pressure tends to compress some of the more aggressive marks, but it rarely eliminates them.
The 2022 and 2023 correction revealed how far venture marks had drifted from realizable exit values. Funds that had marked positions at 40x revenue multiples — justified by public market comps at the time of the last financing — were suddenly holding Level 3 assets at valuations that had no rational basis in a reset market. Some GPs were slow to write down, creating the appearance of fund performance that wouldn't survive an exit. The lag between deteriorating business performance and mark reduction is a structural feature of the system: GPs have discretion, audit happens once a year, and LPs see quarterly reports that reflect manager judgment rather than market clearing prices. The honest answer, as practitioners know, is that a venture fund's net asset value at any point in its life is a range, not a number — and the range is wide.
Gurpreet S. Bal is a corporate partner with 16 years advising on private equity, merger transactions, and public offerings for companies and investors at three of the world's top law firms. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology. For more information and to get in touch, visit gurpreetbal.com.