Venture Capital

The Shifting Ground of Startup Valuations

The world is different now. The startup valuations from yesteryear are out of the window.

Why is this the case?

In an attempt to simplify what is going on, below is one approach for how to think about startup valuations during Bull and Bear fundraising environments.

It comes down to the “Intrinsic Value Demand Curve,” which is the amount of Intrinsic Value in relation to Perceived Value that is demanded by the investor market at any stage of a venture-backed business.

The valuation of a venture-backed business is just the sum of the two aforementioned parts:

Intrinsic Value

Intrinsic Value, based on how Warren Buffet thinks about it, is the estimate of what a business’s future cash-flows will be with an implied discount rate.

Most venture-backed businesses do not generate cash-flows until much closer to their IPO or after (see here for a 2019 consumer IPO breakdown), but when venture capitalists are making an investment decision and ultimately deciding on the valuations they offer, they do take into consideration what a business can look like in the long-run. How much gross margin can this have at scale? Where do profit margins level out? How reasonable are the growth projections?

Perceived Value

Perceived Value, or what some may call Extrinsic Value, is the value ascribed to a business that is not considered a component of Intrinsic Value. A few examples of items that may drive Perceived Value for a business are its team, its strategic positioning in the market, or even the market as a whole that the business participates in.

Below is an illustrative breakdown of how much of a startup’s value can be ascribed to each of the two buckets, over the course of a startup’s life.

As can be seen, at the business formation stage, the value of a business is almost entirely Perceived, rather than Intrinsic. Seed investors are looking to invest in great teams, tackling big markets, with a unique product.

As a venture-backed business scales, the Intrinsic Value also starts to increase. The more predictable the business from a revenue perspective, the higher the Intrinsic Value in relation to the Perceived Value. The business’s future cash-flows become easier to predict.

By the time a business is nearing its IPO, the amount of Perceived Value decreases to a small fraction in comparison to its Intrinsic Value.

Bull Case

In a Bull market, you have flattening and shifting of the curve to the right, wherein the Perceived Value remains at a high percentage even through its IPO. Investors tend to focus less on economic fundamentals and place a higher weight on the general sentiment of the business opportunity at large.

Bear Case

In a Bear market, you have steepening and shifting of the curve to the left, wherein the Perceived Value goes away much faster than in the Base case. Businesses become valued almost entirely on their future cash-flows sooner than later.

The Intrinsic Value Demand Curve

In Bull markets, Perceived value stays around longer, while the actual dollar amount of the Intrinsic Value increases (largely due to more optimistic projections of future cash-flows). In a Bear market, the Perceived Value decreases earlier than normal, and the actual dollar amount of the Intrinsic Value decreases, thus compounding the decrease in the valuation of a company.

The Current Fundraising Environment

Over the past month, we have gone from a Bull fundraising market to a severe Bear one for most start-up founders. Here are a few reasons why:

  1. Venture capital firms are focused on managing/triaging their existing investments
  2. The shift from in-person investment decision making to remote is a major behavioral change from how it worked prior to the virus
  3. Investing in teams that investors have not met is a major hurdle
  4. There is demand uncertainty in many key categories. Examples: small business software, non-essential enterprise software, online retail, travel

All of these drive the number of new venture capital investments down (thus competition amongst investors) and shift the Intrinsic Value demand curve to the left.

What does this mean for startup founders who thinking about raising capital?

Given the steepening and shifting of the Intrinsic Value Demand Curve, most companies will have to generate an increasing amount of Intrinsic Value between their rounds of financings, as that is what investors seek during a Bear fundraising market. Perceived Value is no longer a significant part of the equation.

As a result, in order for a company to increase its valuation, it must be able to increase its Intrinsic Value by greater than the loss of its Perceived Value on a dollar basis.

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Brendan Wales is a Partner at (, a global venture capital firm with offices in San Francisco, Berlin, Sao Paulo, Tokyo, and Beijing. Since joining in 2012, he has invested in companies such as Segment, Acorns, Shipt, HousecallPro,, and Shopmonkey.