Startup Valuation seems a funny game

I teach a number of classes on entrepreneurship and startups across Asia. Almost every group wants to know about how valuation is arrived at. Though I do justice to the various methods of arriving at ‘valuation’, I insist of letting them know that the practice is fairly disconnected from theoretical classroom discussions. The theoretical models help gain a range of values and one has to add the euphoria of the market, emotions of those involved etc before arriving at the final value. One new item caught my attention and reminded me of our classroom discussions.

News item titled ‘Lyft Receives $500 Million Investment From General Motors to Develop Self-Driving Cars’ (Link: http://www.inc.com/associated-press/lyft-general-motors-500-million-dollar-investment.html?). In particular this paragraph caught my attention.

‘Following its latest round of fund-raising–which also included a $100 million investment from Saudi Arabia’s Kingdom Holding Co.–privately-held Lyft set its value at $5.5 billion. The company expects revenue of around $1 billion this year. By comparison, GM is valued at $53 billion and earned $153 billion in revenue in 2014.’ (quoted as is from the above linked article. purely for academic explanation)

After reading it a few times, I thought it was to be shared in valuation classes. Is there really a relationship between revenue and value? If valuation is really about the future, how much of it can truly be captured? And if everything is captured, then where is the fun in valuation?

It is this uncertainty and varying perceptions of it, that make a market possible. In such a market, valuation thrives. We still have to learn the techniques, but remember that what happens in the world will have an irrational component added to the mathematics.

Happy Thinking!!

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