Little VC secret: Valuation is in the eye of the beholder
The lack of transparency at VC firms continues to be a problem as is apparent now in the issue of valuations according to this Wall Street Journal story (subscription required) which describes in detail Santera, a telecommunications startup:
Therein lies one of the little secrets of venture capital these days: Different VC firms value companies in their funds in startlingly divergent ways. The effect is that some funds, by not marking down valuations sufficiently, may be making their funds' performances look better than they are. Investors worry that it also means that the value of the hundreds of billions of dollars invested in venture funds in the late 1990s may be overestimated, long after the tech bubble burst and knocked down the value of many public stocks by 90% or more.
In the case of Santera, which has received more than $200 million in private equity financing and has 250 employees, one investor who has backed Santera through two venture funds, says its series A preferred stock is valued at 46 cents on the books of Sequoia Capital and $4.42 in the most recent second-quarter report of Austin Ventures.
...The pricing difference is far from unusual, according to a study by the Tuck School of Business at Dartmouth. In part, it also explains the push by investors for more openness from VC firms on the real rates of return for venture investments and the value of these holdings. As one investor, worried about overly optimistic estimates, puts it: "Does this mean [VC firms] are telling me the value of our portfolio is $100 million when it's really worth only $10 million?"