Why Public and Private Market Valuations Are Different | Hacker News Reader

Why Public and Private Market Valuations Are Different

mahesh-vc.com

24 pointsprostoalex10 comments

The title and thesis don't match the data. This has nothing to do with whether a corporation is privately or publicly held, and everything to do with where it is in its lifecycle. The actual assertion made, which the evidence does match, is that younger companies are harder to value because uncertainty over growth and future margins is much higher. Seems pretty obvious.

Easier to read as a scatterplot: http://s2.postimg.org/ysodz3mc9/multiplevmargin.png

This is great data, and a lesson for where an early stage company's valuation is headed as a company matures.

Also a reminder why VCs have a liquidation preference. At early stages they're willing to pay higher multiples assuming rapid growth continues. But they're protected if it doesn't.

The slope of your line is basically (EV/Revenue)/(Profit/Revenue) => EV/Profit which sums up what this article should have been about: P/E ratios are what actually matter. All the other terms just let you thread the needle between a company that's heavily reinvesting (where P may be misleading) versus one that's generating so much cash it can't imagine putting the rest to good use (Apple, Google, to some degree Facebook). Still, I definitely agree that your chart or something like it is what I expected from the article.

There is a hypothesis that this is driven by the fact that VC firms are playing with other people's money, which must be "invested" in order to collect fees, and they often sell those assets to other VC-backed firms which are also using other people's money.

In an illiquid environment with tons of collusion and principal / agent problems incentivising towards higher prices (and thus greater AUM), you'll tend to see prices diverge from those in a market open to anyone who thinks they can play the game better.

The private market for VC backed companies is illiquid -- there's no real market. The private valuations are mostly sales fluff and politicking about dilution.

For conventional companies, reality is different. WalMart is what it is, nobody is going to pay a 100x multiple for it.

>The private market for VC backed companies is illiquid -- there's no real market.

If you are talking about a secondary retail market - which is what the NYSE and NASDAQ are - then that is true, but misses the point.

There is an actual market and it's within private finance both primary and secondary. Angels, VC's, LP's and other companies are the regulation sanctioned participants in this market. Just because it's a smaller market doesn't mean it isn't a market.

>The private valuations are mostly sales fluff and politicking about dilution.

Not true. Those valuations are the basis for real cash based investments or mergers/acquisitions.

Um, liquidation preferences for one seems like the easy answer.

How about the third option, both public and private companies are overvalued. And no, they can't both be undervalued, it's not possible, especially in this market.

While this is almost certainly true relative to the (as yet unknown) true value of most corporations, that doesn't change the fact that most people now living will never again see 3% dollar interest rates. So while the dividends you get from investing in any of these things are not worth the capital, you'll probably be dead before the principal is lost, and in the meantime you'll have gotten more than you could have by owning Treasuries.

Overvalued? Yeah, for sure. Only game in town, too, until the revolution.

It's dangerous and biased to assume a company like Apple had its stock increased because of 'innovation' or 'disruption'.

A lot of it was a consequence of Fed's policies mainly with ZIRP and QE. From that angle, overvaluation of public companies is more likely than the latter.

And, if startups are 'less undervalued'~'more overvalued' than public companies, it only means they're more prone to volatility, busts and bloodbaths.

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