investing

What is Valuation?

What a company is worth on paper - the number that determines whether you're getting a deal or getting fleeced.

Valuation is the process of determining a company's worth. It's the number that sets your entry price and ultimately determines your returns.

Why it matters: Even the best company is a bad investment at the wrong valuation. Instagram was bought for $1B (seemed expensive then) and is now worth $100B+. WeWork was valued at $47B and went nearly bankrupt. Entry price matters.

Common valuation methods:

Revenue multiple: Value = Revenue × Industry multiple (e.g., 10x for SaaS)
DCF: Discounted cash flow - project future earnings, discount to present
Comparable companies: Value based on similar public companies
Last round pricing: Private company valued at last funding round price

Key metrics: Market cap, fully diluted valuation (FDV), enterprise value (EV), price-to-earnings (P/E), price-to-sales (P/S).

Private vs public valuations: Private valuations are set infrequently during funding rounds and can become stale between events, while public markets reprice companies every second. This disconnect means pre-IPO valuations can represent both opportunity and risk. You might buy at a private valuation that looks cheap compared to public peers, or you could overpay based on an inflated last round that the public market refuses to honor at listing.

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Examples

1.Stripe's last private valuation was $95B in 2021. In 2023, it cut to $50B. Entry point matters - 2021 investors are underwater.
2.Figma was valued at $10B in 2021, almost acquired for $20B, and later valued around $12B. Knowing these ranges helps assess opportunity.

Frequently Asked Questions

What is valuation in simple terms?

Valuation is what a company is worth. For public companies, it's market cap (share price × shares). For private companies, it's based on the last funding round or comparable company analysis.

How do you value a pre-IPO company?

Common methods: 1) Revenue multiple (10-20x for high-growth SaaS), 2) Comparable public companies, 3) Last funding round price, 4) DCF for profitable companies.

Is a high valuation good or bad?

It depends on growth and entry point. A $50B company growing 100% yearly may be cheap. A $5B company growing 10% may be expensive. Compare valuation to growth rate, margins, and market size.

More investing Terms

Pre-IPO Investing

Buying shares in private companies before they go public - the strategy that made early investors in Uber, Airbnb, and SpaceX millionaires.

Accredited Investor

A wealthy individual or institution that meets SEC criteria to invest in unregistered securities - the traditional gatekeeper to pre-IPO deals.

Due Diligence

The research process before investing - examining financials, team, market, and risks to avoid putting money into a disaster.

Equity Dilution

When new shares are issued and your ownership percentage shrinks - the silent wealth transfer from early shareholders to new investors.

Secondary Markets

Platforms where you can buy and sell pre-IPO shares from existing shareholders - your liquidity lifeline before a company goes public.

SPV

A Special Purpose Vehicle pools money from multiple investors to meet minimums for pre-IPO deals - your ticket to the table when you can't buy a whole seat.

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