Earlier this week, I was in Silicon Valley to moderate a panel on portfolio company valuations. Unfortunately, I had two problems: (A) There’s no way I know more about this subject than the average attendee, who was a VC firm CFO; and (B) Somehow I only had one panelist. So what to do?
My makeshift solution was to turn our session into a mock trial of FAS 157, the new fair-value accounting rule that has set GP tongues a’ grumbling. Specifically, we charged it with being unfair to venture capital firms. I asked one attendee table to play prosecution and one to play defenders. We also had witnesses: FAS 157 in the flesh, played by my panelist from PwC; two venture firm CFOs (witnesses for the prosecution); and two limited partners (witnesses for the defense).
I was judge, and everyone else was a juror.
Before letting everyone in on the plan, I asked attendees to raise their hands if they thought FAS 157 was fair to VC firms. Over back-to-back sessions, only two of around 140 attendees demurred. In other words, the scene was set for a prosecution cakewalk.
But here’s the thing: It’s difficult to make cogent argument against FAS 157, unless you admit up-front that your gripes are about added hassle and cost. Buyout and venture capital firms always have been expected to follow fair-value accounting standards, so the only real changes should be in paperwork standardization. You can certainly argue – and our prosecutors did – that FAS 157 doesn’t lead to better valuations, but it’s hard to asset they’re any worse (save for the false sense of security they may give inexperienced LPs).
Prosecutors also focused on the dangers of increased volatility in quarterly reports, but the defenders got almost all witnesses to admit that LPs already experience such volatility in the rest of their asset classes. Moreover, FAS 157 puts all asset classes under the same rules, which could actually make LP jobs easier – particularly when it comes to matters of allocation and portfolio manager compensation.
In fact, the only difficult moment for defenders came during their cross-examination of Jim Kunse, chief financial officer for El Dorado Ventures. Jim told them that his firm had just invested in a company that makes magic beans that create renewable energy. Moreover, the beans replicate themselves wirelessly. “There is no comparable for this company,” he said to cheers from the gallery.
Despite Jim’s rousing testimony, FAS 157 was cleared of all charges in our first session. It was then found guilty in our second session – although by a narrower margin than it had been previously found guilty by. In other words, a split decision that tilted toward absolution for a rule that most everyone in the room detested.