Lately, there’s been much debate around the merits of private IPOs (whether they actually exist is another conversation) and the growing herd of unicorns dominating Silicon Valley. In fact, a report from CB Insights suggests that there are now 9 times more ‘private IPOs’ than actual tech IPOs.
That said, I’m not here to debate the strategy or implications of the public vs. private debate, or try to predict whether we’re in a wet or dry bubble (or no bubble at all). Instead, I want to refocus the valuation conversation around how we should really be defining a company’s value.
Too often, this discussion revolves only around the number that private markets assign to a company. While that valuation is important and can be one reflection of a company’s value, it’s certainly not the only factor to consider. In fact, private valuations are often incomplete measurements of a company’s true value because they fail to consider a somewhat theoretical, intangible question: How badly do people want this company to exist?
Granted, VCs generally do a decent job of answering that question by examining things like growth rate, revenue, market opportunities and customer and employee satisfaction in the diligence process. But, in my experience, that diligence just scratches the surface. To really understand a company’s value, you have to dig into how badly four key groups of stakeholders want a company to exist, thrive and grow:
- Customers and partners: If the business went away, could these stakeholders find an adequate replacement and not miss a beat? Conversely, if a business grew, added features and functionality and broadened its value to this group, how would that impact the way they value the business and its product/services?
- Employees: This is obvious, partly because employees are naturally invested in a company’s success, but how badly do employees want the company to succeed? Are they truly motivated to take it to the next level? Does the culture value their contributions? And is the company structure set up in a way that supports their personal and professional growth?
- Communities:This could include charitable programs a business is involved in (see: Salesforce.org), a large support community of users and advocates (see: Buffer), or the actual geographic community where the company has offices. In my experience, when these communities are deeply invested in seeing a business succeed, it causes a ripple effect that increases a company’s overall value.
- Shareholders:This includes VCs, LPs invested in those VC funds and other shareholders whose liquidity is tied to the company’s real market value (not the paper markup that comes from late-stage private financings). How badly do these investors want the company to exist? The more they see real opportunity and impact, the more they’ll want to support the business at every stage of its growth, and the more patient they’ll be about waiting for liquidity.
Ultimately, each of those constituencies will favor different angles of tangible and intangible value, and some of those value factors will overlap. But again, the common thread is the passion each group has for ensuring the business survives and thrives for as long as possible. If a company’s product, culture and operational execution are all aligned with maximizing that desire, then each of the groups mentioned above will follow the business to the moon and sky-high valuations will take care of themselves.
On the flip side, the more any of these constituencies lose interest in a company or, even worse, are passionately negative about a company’s existence, the more the company’s future prospects and, therefore, valuation will dim. And if it dims too much, the lights could go out.