Every fund marks its book. Very few explain how. After two years of marking a Reg CF portfolio every quarter, I think the explanation matters more than the number, because the number is only as honest as the rule that produced it.
Here is the rule we landed on, and the mistake that taught it to us.
The announcement is not the evidence
A founder can announce any valuation. A press release can say a company "raised at $50 million." A pitch deck can carry a number that no investor has yet accepted. None of that is a price. A price is what someone actually paid, documented in a filing, a term sheet or a closing statement that we can read and that a third party could check.
So the first half of the rule is simple: no document, no markup. If the only support for a higher valuation is a conversation, a slide or a target, the position stays at cost. We would rather carry a company at what we paid for two years than carry it at a number we cannot defend for one quarter.
The headline can go up while your shares do not
The second half is subtler, and it is the one that caught us.
Suppose we buy shares at $10 each when a company is valued at $20 million. A year later the company announces a new round at a $30 million valuation. The instinct, and the industry habit, is to mark the position up 50 percent.
But valuation is price per share multiplied by shares outstanding, and shares outstanding grow. If the company issued new shares, converted a stack of SAFEs and expanded its option pool between the two rounds, the new investors may be paying $10 a share, or less, for a company that is now worth $30 million on paper only because there are more pieces of it. Our piece did not get more valuable. We just own a smaller fraction of a bigger number.
We found this in our own book. Positions that looked like clear gains in a press release turned out, on a per-share comparison, to be flat. The headline valuation had risen; the price a new investor paid for one share had not. Marking those positions to the headline would have booked dilution as profit.
The per-share check
So every quarter, for every position where a share price exists, we now compare the price per share paid by the newest investors to the price per share we paid. If it has not risen, the position does not move, whatever the headline says. If it has, we mark to it and cite the document.
For positions held as convertibles with a cap and no share price yet, the comparison is not available, and we hold at cost rather than estimate. A cap is a ceiling on a future price, not a price.
Why this makes our marks lower, and why that is the point
A fund that marks to headlines will show a better book than we do on the same companies. That is a feature of the method, not a flaw in the portfolio. Unrealized venture marks are an estimate, and the only thing that makes an estimate worth reading is knowing what would have to be true for it to be right. For ours, the answer is always the same: somebody paid this price, per share, and here is the document.
Our investors see every mark, its date and its source through the investor login. We do not publish the figures on the public site, but we publish the rule, because the rule is the part that should be judged.
Sherwood Neiss, Managing Partner