My goal here is not to comment on these specific companies and justify a long or short thesis. In each case, there are many variables to consider. The disagreement about the valuation of fast-growing companies certainly goes beyond cultural and geographical differences (I’m sure a lot of people on the West Coast are also sceptical about Tesla). I think what’s interesting here is the challenge of pricing these disruptive companies and the fight for the dominant narrative.
If you go back to the Uber example, at the heart of the disagreement was the TAM (“Total Addressable Market”). The NYC finance professor was looking at Uber as a taxi business trying to gain market share, the silicon valley VC saw a company that could directly challenge car ownership.
Companies are traditionally valued by taking future cash flows and discounting them. Future cash flows are based on future growth. The valuation of most disruptive tech companies implies massive growth that can be hard to visualise or believe. A lot depends on the market you’re looking at. That’s usually where the narrative opportunity lies and where the finance vs tech clash usually happens. In a world that generally celebrated and admired the rise of technology companies (until 2018 that is), visionary founders have had the opportunity to influence the valuation of their companies even when they are public by driving the perspective on how to think about their current and future markets. Tech people can get really creative when it comes to thinking about markets, for the better… or the worse sometimes
In the early-stage venture capital business, we try to identify uniquely talented founders and try to see what they see. It’s a visualisation exercise. You look at the world in motion and think “what if?”. There is usually little data to make your decision. At a more mature stage, companies have more data to show and there are all sorts of financial methods to value them. The financial narrative starts to challenge the technological one. When numbers meet code, words can help to reconcile the two by helping people understand where the company will go in the future. The best founders continue to help you “see the invisible” way beyond the VC stage.
Let’s take a few examples:
- I have already mentioned Tesla and Elon Musk. Musk is a fascinating and divisive figure but the success of both Tesla and SpaceX is based on his incredible ability to craft a powerful narrative around his companies (obviously coupled with incredible engineering work).
- Amazon: for years, most financial analysts struggled to understand how an online book store would ever make money. Jeff Bezos is famous for not letting financial pundits and public market expectations drive the narrative for how his company should be valued. He always focused on the long term. If you read the book “The Everything Store”, you would know that Bezos had a grand vision from day 0 (already reflected in the name he picked for the company). He did not only want to build the largest online retailer but he wanted to build a technology company. This drive pushed him and the company to launch AWS. It was impossible to predict that Amazon was going to get into the cloud infrastructure business but those who believed in the “invisible” (and bought the stock) were immensely rewarded.
- A few weeks ago, SAP announced they were acquiring the SaaS company Qualtrics for $8Bn, a reported 20x multiple on their revenues. Prior to the acquisition, the startup had been preparing a listing on Nasdaq at a potential $4.5Bn valuation. The deal was obviously described by financial analysts as massively expensive and dilutive for SAP. Bryce Roberts, a VC, wrote a great thread on twitter offering an interesting perspective on Qualtrics’ journey and what might have led SAP to pay such a hefty price tag. In short, a new narrative allowed them to position the business as the creator and de facto leader of a new software category. From SAP’s perspective, they bought growth (the holy word in public markets) in a new category.