The 12-18 month rule (and other valuation “secrets”)
If you missed this week’s virtual event on “The Art and Science of Venture Valuations,” here’s what you need to know.
We had Dan (CFO at Lerer Hippeau with $1.5B AUM), Matt (CFO at Flybridge Capital), and Damien (from Aumni by J.P. Morgan) break down the real-world practices behind venture valuations.
Scroll down to watch the recap (or just keep scrolling for a summary) 👇
The 12-18 Month Rule That Most Funds Follow
Here’s the rule of thumb most funds use:
Hold your companies at the latest post-money valuation for 12-18 months.
Why? Because these early-stage companies typically raise capital every 18 months anyway. So you’ll get a new market-based valuation soon enough.
The trick is having this clearly documented in your valuation policy and applying it consistently across your entire portfolio.
How to Handle SAFEs and Convertible Notes
Both Dan and Matt shared the same approach here:
Never mark up to a SAFE cap. It’s not a defined price.
But consider marking down. If your company is valued at $50M and your SAFE has a $20M cap, you might mark down to the cap based on conservatism principles.
The reasoning? When that SAFE converts, it’s not going to be worth more than the cap anyway.
The KPI Collection Reality Check
What data should you actually be collecting from portfolio companies?
For early stage: Revenue, cash on hand, and burn rate. Everything else is nice-to-have.
For later stage: Add headcount, gross margin, OpEx, and EBITDA to the mix.
But here’s what Matt pointed out that resonated with everyone: the data collection process isn’t just about valuations.
It’s one of your best touchpoints with founders, especially when you’re managing 400+ companies and can’t be front-and-center with all of them.
Secondary Market Transactions
Dan shared a recent example where his fund bought $1M of common stock on the secondary market at a 50% discount to their current valuation.
Did they mark down their entire position? No.
Their auditor agreed that secondary markets aren’t considered “orderly markets” under ASC 820. The transaction was with a founder making a charitable contribution, not a typical market transaction.
The key lesson: Work with your auditors early and often on these decisions. Don’t wait until year-end.
When to Hire Your First CFO
Both Dan and Matt agreed: Fund 1 to Fund 2 transition.
During Fund 1, most of your portfolio is held at cost, your fund admin can handle the basics, and everything is relatively straightforward.
By Fund 2, you’re thinking about more complex valuations, managing LP relationships for fundraising, and dealing with realization events. That’s when you need someone who can professionalize your operations.
Matt’s insight: A CFO spends about 50% of their time on portfolio company work—negotiating term sheets, enforcing protective provisions, helping with budgets and modeling.
The AI Valuation Market Reality
Dan put it bluntly after 25 years in the business: “The valuations in AI right now are just so crazy.”
His framework? It comes back to willing buyer, willing seller. If someone values an AI company with “nothing” at $500M, and there are willing participants at that price, that’s the market.
He’s seen this cycle before with EVs, crypto, vertical farming. Eventually, things normalize and you get back to fundamentals.
The Fund Administration Warning
Dan’s hard-earned advice after working with three major fund administrators:
“You really can’t trust 100% of the work they’re providing you.”
The industry has changed dramatically in the last two years. Private equity has bought many fund admins, there’s been significant turnover, and profit margins are now a focus where they weren’t before.
His recommendation: Over-communicate, over-document, and double-check everything.
The full conversation covered much more ground, including liquidation preferences, option pricing models, and the mechanics of cap table waterfalls.
What resonated most with you?
