Valuation ≠ Company’s Value. Some entrepreneurs, and *many* reporters, forget this.
For example: Raising VC money at a $1B+ valuation does not mean the company is worth $1B+
Anytime you read in the news that “X is worth a billion dollars!” because they raised a VC investment – that is basically fake news, perpetrated by reporters that don’t fully understand private financing, and assisted by startups enjoying the hype (“We’re a Unicorn!”)
Valuation of private companies is merely a way to *temporarily* organize the company’s cap table, until the company’s value is sorted out in the future.
A company’s valuation = its value, in just 2 cases:
- When its shares are traded publicly, or –
- When the company (or its shares) is acquired for cash.
“Unicorn” investments in private companies many times have less to do with the value of the company’s business or needs, and often are simply a way to park low-interest $$’s in a high-yielding preference/structure.
To the entrepreneurs that raise at a $1B+ valuation:
- Congrats & well done!!
- Spend every dollar like it’s your last one.
- Don’t forget that the correct time to celebrate an investment is after *returning* it to investors, not when taking it.