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How do VC funds value portfolio companies?

Venture funds value portfolio companies at fair value, usually anchored to the most recent priced round. Valuation is how the fund turns those private stakes into a value an LP and an auditor can both understand and confirm.

Fair value, not cost

The starting principle is that a fund reports its holdings at fair value, what they are worth now, not what it paid for them at the time of purchase. A position bought two years ago is not frozen at the entry price. It is carried at the best current estimate of its value, and that estimate is what rolls up into the fund's net asset value. How the estimate is made is set out in the fund's written valuation policy, and the marks are typically booked by the fund administrator once the GPs approve them. The job is to make that estimate honest and repeatable rather than optimistic.

The most recent round sets the anchor

For an early-stage company, the single best piece of evidence is the price of its most recent priced financing round. A real investor negotiated that price at arm's length, which makes it far more credible than any model. So a fund usually anchors a position to the last round and holds it there until something genuinely changes the picture. This is why a company can grow quietly for a year while its mark stays flat: nothing has happened that meets the bar to move it.

When a mark moves

The fair value levels, briefly

Accounting standards sort valuation inputs into three levels under ASC 820. Level 1 is a quoted price in an active market, like a public stock. Level 2 is observable inputs other than a quoted, public price. Level 3 is unobservable inputs that rely on judgment. Almost every venture position is Level 3, which is the formal way of saying there is no market price and someone has to exercise judgment. That judgment is exactly why funds keep a written valuation policy, so it gets exercised the same way every quarter.

What auditors and LPs expect

Auditors and LPs are less interested in any single mark than in whether the fund follows a consistent, documented policy. They want to see the same method applied every period, evidence behind each change, and no pattern of marking up on thin news while sitting on bad news. The auditors typically test the marks against the valuation policy at year end, and a mark that cannot be supported can hold up the audit while it is reworked. Discipline is more persuasive than a flattering number, because a flattering number that cannot be supported is the one that gets challenged at audit.

For firms assembling that evidence across deal files, board materials, and prior valuation memos, a Central AI Memory Layer can make the supporting record easier to retrieve and govern. It does not replace the valuation policy or the GP’s judgment.

The story your marks tell

Taken one quarter at a time, a mark is just a number in a schedule. Read across several years, the marks become a story, and it is one of the most revealing records a current or prospective investor will ever see about how you actually run the fund. The history shows where you concentrated, how you sized follow-ons, whether you kept reserves for the companies that needed a bridge, and how you behaved when the market turned. A manager who wrote positions down promptly in a hard year, and whose markups were later confirmed by real rounds, carries evidence of accountability that no pitch deck can substitute for. The same history also reveals your temperament as a holder, whether you run conservative or aggressive, and investors will form that judgment from the record whether or not you help them read it.

We believe this makes the valuation history a genuine conversation piece with investors rather than a compliance exhibit. Walking an LP through the marks on two or three companies, why the entry was priced where it was, why you followed on in one round and passed in another, how a reserve carried a company through a rough stretch and where the position sits now, shows them exactly how you support companies over time and how you weather the storms every startup portfolio goes through. Future investors will run this test on your track record during diligence in any case, so it is worth telling the story on your own terms, with your investment thesis as the through line.

The same story has to hold up with your auditors. Every mark needs a justification you would be comfortable saying out loud in an LP meeting and handing to an auditor in writing: the evidence behind the number, the method in the valuation policy it came from, and the reason it moved or held. When the explanation for why a position is held where it is reads the same in the annual meeting and in the audit file, the marks reinforce your thesis instead of undermining it.

Marks in practice

At Graph Advisors we set marks to survive scrutiny. Every position ties to a written policy, every change points to real evidence, and the same basis carries from quarter to quarter so LPs can compare periods. In working with our clients, we have set these marks inside funds and defended them with auditors. The rule that holds up is simple: be quick to write down on real bad news, and slow to write up without a priced round behind you. These marks then flow straight into how the fund's NAV is calculated and into the performance metrics LPs track.

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