Startup investing is inherently risky. An estimated 75-90% of businesses fail - you can read more here.
Given this market dynamic, FundersClub follows the standard practice of many leading VC firms and subjectively marks down selected investments when we internally have reason to believe that the fair market value of our securities is lower.
Due to the lack of information made available by private companies, we often do not mark down investments that, if we had additional information, we would have marked down. As a result, FundersClub’s markdowns often will not fully capture the degree of impairment across a portfolio. There are likely businesses that we would mark down if we had access to more information.
There are numerous factors that could justify a markdown. For example, a markdown can occur if a given company has seen a loss of or an inability to find strong product-market fit (often observed as key metrics falling flat or decreasing for many periods in a row). Markdowns are not limited to companies that are not making business progress--markdowns may also be applied to the valuations at which companies have recently raised financing, since those valuations and our subjective perception of the company’s value may differ substantially. As such, our decision to markdown is highly subjective and based on incomplete information. As discussed above, for the same reasons, FundersClub does not report markups in the absence of a third-party valuation event (such as a subsequent fundraising round) to validate a new valuation.
Importantly, FundersClub never reports markdowns on a company-by-company basis, only on an aggregate portfolio basis, for the reasons described here.
The methodology used by the FundersClub internal Investment Committee is inherently subjective and incomplete due to the varying levels of information received by FundersClub on the traction of, risks faced by, and overall status of businesses funded by FundersClub, as well as varying perceptions of business status by the Investment Committee. As with unrealized values, our markdowns, may be inaccurate and ultimately have no bearing on actual realized outcomes.