Reporting venture capital performance to investors has always been a sensitive issue for venture capital funds, even in good times. But recent, challenging market conditions along with the passage of the Sarbanes-Oxley Act has made it an even more contentious issue. Without a doubt, the Sarbanes-Oxley Act is the single most onerous legislation impacting governance, financial disclosure and the practice of public accounting since the US securities laws of the early 1930s. The lack of a universally accepted standard for financial reporting, as well as a lack of consensus on what would constitute a set of best practices, creates a potentially dangerous financial scenario for the entire venture capital industry.
In this article, I will explore the issues surrounding portfolio performance, specifically the valuation metrics, which are used to demonstrate a fund's success or lack luster performance. We'll explore the inequity in the current methods used, their inherent conflicts and flaws, and, an approach for improving the fairness within the valuation reporting process. I believe that there is a clear necessity to implement certain Sarbanes-Oxley best practices to the process of setting these values on venture capital holdings, as well as implementing sound business processes.
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