startup valuations out of thin air

Apr 18 14 Comments

Please comment if you know your stuff.

If a startup raises 100M and is valued at 2B, then the rest of 1.9B is actually not backed by real money. The real money is 100M. (Assume profit cancels out operating cost)

If that startup goes IPO at 2B, and the public puts extra 100M, then the sum of the money that went to the startup is 200M but is valued nearly at slightly above 2B.

So essentially, market cap != real money.

Now, if that startup wants to be valued at 5B, does it actually require investors to put “actual” money worth of 3B?

Or is it possible that market cap reaches 5B without the real money going in once in public

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TOP 14 Comments
  • Market cap is a value placed on the equity portion of the business, not a value placed on the assets of the business.
    Apr 18 7
    • OP
      What determines market cap of a public company, if not outstanding shares * price of each share backed by Actual money from investors?
      Apr 18
    • In short, it's about forward expectations because a company isn't going to sit on the cash invested in it. It's going to invest it to generate more returns for investors or burn through it and go bankrupt. What price per share you assign to that expectation is based on financial models and subjective opinion. That price will then drive your market cap calculation and will fluctuate as expectations change.

      I'd suggest researching how public company valuations are done; check out investopedia and google around as starters (ex. discounted cash flow and industry comparables). After that, read up on the private company and SaaS side in particular because they're done very differently from other industries. It can be risky for your personal finances/expectations if you're in this space without that knowledge; you won't know what equity numbers are reasonable and what numbers are moonshots. Startups are even harder to value because of how fragile they are.
      Apr 18
  • Plaid
    tupl

    Go to company page Plaid

    tupl
    Valuation of a business is not the sum of its assets. Is this a troll post?
    Apr 18 0
  • Uber
    hfHH16

    Go to company page Uber

    hfHH16
    Yes it’s not really true that a startup that raises 100m on 2b valuation is really worth 2b. This is because VCs get preferred shares and valuation don’t mean nearly as much to them. If startup goes bust they get back their 100m first before all the employee shares.
    Apr 18 2
  • Amazon
    bbmite

    Go to company page Amazon

    bbmite
    Usually the case, unless you get a buyout offer for $43B from Musk...
    Apr 18 0
  • Google
    lowbarboi

    Go to company page Google

    lowbarboi
    For a start up to be valued at 5b, it needs a reputable investor willing to buy any amount of shares from the company with each share valued at 5 billion/total number of shares issued.

    It is more complicated than this because investors especially early stage ones enjoy other benefits but basically this.
    Apr 18 0