If you follow financial news at all, you’ve probably seen stories on the “markups” and “markdowns” of the value of various private companies by different mutual funds that own positions in those companies. Nutanix, a MicroVentures portfolio company, for example, was marked up 19% in March after being marked down 17% in January. It saw similar fluctuations last year when it was marked up 23% in October, then marked down 10.7% in November.
Nutanix isn’t the only private company facing a shifting valuation. Domo, another MicroVentures portfolio company, has seen similar variations in valuation. The company was marked down 29% in February, only to be marked up 68% in March.
Mutual funds such as Fidelity and T. Rowe Price are required to report estimated fair values of their private equity holdings each month, and these estimates can not only vary from one month to the next, they can vary from mutual fund to mutual fund. For example, T. Rowe Price recently marked down Dropbox, giving it an estimated valuation of $4.1 billion, while MetLife had the company valued at $6.8 billion. It’s not unheard of for a mutual fund to value a given position 50% lower than another mutual fund holding the same position.
The variable nature of these valuations – from month to month and from mutual fund to mutual fund – just goes to show how challenging it is to determine “fair value.” It’s not as simple as taking the number of shares and multiplying by the share price. The valuation committees are compelled to look at the market value of comparable public companies for guidance – and that isn’t always the best approach. What’s going on at a publicly traded Marriott International, for example, is not necessarily reflective or predictive of what’s going on at Airbnb. In fact, it may very well indicate the opposite. Among other major differences, the business models simply don’t match up.
The fact is, it’s nearly impossible to set an accurate valuation on these companies. In addition to market conditions, the valuation committee’s decision on assumptions used for their valuation models can change from month to month – assumptions that the general public is not privy to. In short, it’s more art than science.
Very often, the end result is an estimated valuation that doesn’t make much sense, either to investors or to the market in general. At best, these dramatic shifts are confusing. At worst, they can lead to unnecessary investor alarm. Along with others in the industry, we’ve learned at MicroVentures to take these monthly markups and markdowns with a grain of salt, and we encourage our investors to do the same.