Why Fund Managers Should Reconsider Their Valuation Approach in Today’s Market

Venture and private equity markets are at a standstill, IPO and M&A activity remains subdued,  and financing rounds are less frequent. Even more, private companies are staying private longer than ever. Money isn’t flowing into new investments, and it isn’t flowing out via exits.

In the absence of new data points, many can no longer rely on stale last-round pricing. Instead, they need a more nuanced, defensible approach, one that can stand up to auditor and limited partner (LP) scrutiny.

Why Last-Round Pricing Isn’t Enough Anymore

Last-round financing has long been a convenient valuation benchmark if the round was recent. But fundraising has slowed significantly, rendering last-round data less reliable, especially for ASC 820 fair value marks, because it no longer reflects the current market. PitchBook, Carta, and other sources have shown that deal activity remains well below 2021 levels. Worse, there’s limited visibility into peer companies due to the overall market slowdown. As Redwood Partner Tim Montgomery says, “There just aren’t as many rounds of financing. So funds need to reassess value—whether they do that internally or with a third party like Redwood.”

In early-stage and biotech portfolios, the issue compounds. These companies often lack revenue and comparable peers, making traditional multiples or market-based approaches impossible. Funds need expert modeling, deep company knowledge, and alternative methodologies that reflect current realities.

Audit Scrutiny Is Rising and So Are the Stakes

Auditors are under pressure too. With fewer observable transactions in the market, they’re pushing harder on valuation assumptions and documentation. “There’s more scrutiny in 2024 than there was in 2023, and 2023 saw more scrutiny than 2022. That trend isn’t slowing down,” says Montgomery. 

Auditors are questioning methodologies that previously went unchallenged. For example, they’re comparing valuations to public company multiples and asking why a private investment might be marked at 10 x revenue when public comps are trading at five. If the valuation team can’t clearly justify the difference between their valuation and what auditors expect (based on public market comparables or other benchmarks), the audit process may hit delays, or result in the valuation being rejected.

Internal Teams Are Overloaded

Finance teams at venture and PE funds are being asked to do more with fewer data points. With growing portfolios and fewer liquidity events, the volume of companies requiring valuation is up, while the clarity of inputs is down. Montgomery notes, “There are just more companies that need analysis. But internal models often aren’t built to handle this scale—or this level of audit scrutiny.”

Funds face mounting pressure to provide valuations quarterly or annually. For assets with complex structures, limited data, or pre-revenue models, the burden of proof falls on the internal team unless a third party steps in.

The Case for Independent, Third-Party Valuation Providers

Redwood isn’t here to time the market or chase markdowns. We exist to help fund managers build and defend fair value conclusions based on real-world complexity, not outdated shortcuts. Montgomery explains, “The real value of working with Redwood is that we understand the ecosystem better than anyone, and we work directly with the fund to reflect what’s really happening with the company.”

Our team works closely with general partners (GPs), CFOs, and portfolio company leadership. We don’t rely on a one-size-fits-all model. We tailor valuation methodology to the specific structure, stage, and market context of each company, including:

• Recapitalizations that distort implied value

• Pre-revenue biotech companies that defy traditional comps

• Lumpy or uneven revenue streams that distort traditional valuation multiples

• High-potential, low-revenue investments that auditors instinctively push back on

In a market where auditors are asking tougher questions, we build valuations that answer them, firmly defensible and rooted in ASC 820 standards. We’ve defended valuations higher than expected because we understood the growth profile, market fit, and comparable benchmarks, not just the revenue line.

LP Expectations Are Tightening

Today’s LPs aren’t just asking for numbers. They want accuracy for reporting, risk management, and asset allocation. For example, if a fund marks a company at $1/share because that was the last round, but the company is truly worth $20, they may be overallocated and out of compliance with their own investment policy.

Misstated valuations, whether too high or too low, can create risk exposure for LPs. Accurate, up-to-date valuations protect fund credibility, investor trust, and allocation mandates.

What Fund Managers Should Do Now

In this environment, a valuation is a strategic function as much as it is compliance. Here’s what funds should prioritize:

• Move beyond shortcuts: Stop relying solely on last-round pricing or public multiples.

• Partner with experts: Work with valuation providers who understand nuance and tailor their approach.

• Audit-proof your process: Ensure assumptions, inputs, and methodologies are well-supported and documented.

• Stay LP-ready: Deliver accurate, supportable valuations that hold up under allocation and performance review.

Redwood’s High-Touch Model Outperforms Automated Platforms

Automated valuation platforms can’t handle today’s complexities, such as recapitalizations, debt structures, pre-revenue biotech companies, or context-specific anomalies. And they certainly don’t defend your valuation during an audit. Software-driven solutions just aren’t built to reflect the nuances of the current market. They’re numbers in, numbers out, and it’s not good enough.

Redwood takes a different approach. We collaborate closely with fund teams to understand the qualitative and quantitative details that matter. We deliver audit-ready valuations with context, clarity, and conviction, backed by a team that’s worked across hundreds of funds and thousands of companies.

Conclusion: Valuation Is Now a Strategic Imperative

The market may be on pause, but expectations are not. LPs want accuracy. Auditors want evidence. And fund managers need valuation processes that can stand up to both.

Redwood helps funds meet the moment with deep expertise, tailored methodology, and defensible conclusions that go beyond templates and trends.

If your valuation strategy hasn’t evolved with the market, it’s time to reconsider your approach. Redwood is here to help.