File the newly enacted FAS 157 under “stupid accounting tricks”. In addition to making investments and representing Foundry Group on the boards of companies we’ve invested in, my partner Jason Mendelson also runs our back office and is responsible for overseeing our audits and financial reporting to our investors. Jason is knee-deep in audit season right now, and he has a great and detailed rant up at Venture Beat about the stupidity of FAS 157.
FAS 157 is theoretically designed to make the valuation of our portfolio more transparent to our investors by requiring us to value our investments at “fair market value”. Sounds like motherhood and apple pie, right? Who could have a problem with this? Well it turns out that valuing early stage private companies like the ones we invest in is more art than science and valuations are open to interpretation (and discretion), thus opening the whole system to valuation related liability and false comfort from false precision. In the good old days of VC, one basically (with a few exceptions) set the valuation of a company to the price of the last round of financing. While there were situations in which this could produce misleading valuations (particularly when the market was going down), it worked pretty well and in my opinion, and didn’t create busy work that leads false precision around company valuations.
While FAS157 arguably makes sense when valuing public companies (and perhaps formerly public companies that were taken private and have the scale for public market comps to make sense), for the early stage venture world, it creates a process that wastes resources and money and helps no one but the accounting firms — and perhaps law firms down the line when valuation lawsuits start inevitably springing up.
I am constantly amazed by the the creativity and initiative the accounting industry has shown in the wake of scandals like Enron and Worldcom. While they were complicit in these frauds, they somehow came out the other side as beneficiaries when laws like Sarbanes-Oxley and rules like 409A were enacted, essentially creating entirely new lines of business and mandatory employment for themselves. And now they’ve come up with FAS 157, finding yet another way to bill ever more hours to produce an end result that has little meaning and helps no one. At least not in my corner of the universe, the early-stage VC world.