Cambridge VC Benchmarks will be worthless for the next 24 months
First off, apologies for the clickbait title.
Secondly, I am a huge fan of Cambridge’s benchmarks. They are the best in the game and have been a huge help in my LP role.
If you don’t use Cambridge — subscribe ASAP here.
I am sharing thoughts on a unique point in time for the VC industry and LPs investing VC funds. I will posit that many LPs (including myself) utilized benchmarks to gauge the historical performance of VC funds. I posit for the next 12+ months, that needs to be shelved.
In discussing 12/31/22 marks with many GPs, everyone agrees Fair Market Value (FMV) is non-trivial right now for the underlying companies. Most of the industry relied on Last Round Price (or a slight variation of it). In assessing the FMV of each position, portfolio positions are currently fitting into three buckets:
- Round was done within the last 12 months, hence LRP is the cleanest guide.
- Round was done more than 12 months ago and the company is ‘of-scale.’
- Round was done more than 12 months ago and it is still a nascent company.
Bucket 1: LRP is the cleanest, but is it the most accurate? A GP is scrutinized either way…
If the round was done at a seemingly high price, and the GP does not take a discount she is asked why? If she does proactively discount the value, she is asked if the company is impaired.
Bucket 2: In this case, most VC firms are utilizing an independent valuation service provider. The caveat is they are not all using the same one, and at this stage, valuation is still more art than science:
- No EBITDA, so no EBITDA multiple to assess. Pro-forma of EBITDA six years from now… difficult.
- I am of the belief that an Analyst can use revenue comps to defend a valuation between $1B and $10B with equal vehemence…
Bucket 3: In this case, the cleanest method is to use LRP. Some GPs are doing a broad-base discount, but this is false precision.
Given the above, the highest TVPI funds right now are the funds with the largest % of the portfolio that raised new rounds 3–12 months ago, meaning LRP is the cleanest method and the pricing was still in the hype cycle.
The only salve — less reliance on benchmarks until further notice, and an increased focus on bottom-up portfolio analysis.