Conjecture on Private-Company Valuations Just Doesn’t Matter

Venture capitalist Fred Wilson isn’t enamored of all the speculative writing on blogs about the estimated market valuations of private companies.

One problem, which Wilson cites, is that private companies don’t have valuations. They’re not public, their shares don’t trade on markets, they frequently don’t have business models or even revenues, and they’re often still growing into their corporate exoskeletons.

That means ascribing valuations to such companies is nothing more than a fantasy parlor game. There’s no way to be right or wrong in one’s opinion. Only the market, comprising buyers and sellers, can decide the valuation, and the market hasn’t been given the opportunity to deliver its verdict. That won’t stop pundits from engaging in hypothetical discussions and debates about whether Facebook is worth $10 billion or Twitter $1 billion.

Obviously these arguments have no practical utility. Until one of these companies goes public or is acquired, no known value can be attributed to any of them.

The whole hypothetical exercise seems to drive Wilson up the wall. As an investor in Twitter, he’s concerned that all the external conjecture about the company’s putative value might distract the firm’s employees from what they ought to be doing: building a business.

Says Wilson:

But I think all the focus on what a company is worth can be bad. These companies are private for a reason. Most of them aren’t mature enough to be public companies. They often don’t have full management teams and some don’t even have revenues. The focus inside these companies needs to be on building the company, the product, and the business. And endless discussions about what their company is worth can be terribly distracting.

I saw this in action back in the late 90s when a bunch of our portfolio companies went public before they were ready. The employees spent too much time focused on the stock price and too little time focused on the business. Many employees starting counting their net worth in stock that was not liquid and eventually was worth pennies on the dollar of what they thought it was worth.

I understand his concern. I can appreciate why he thinks all the idle talk about private-company valuations might be deleterious to his investment in Twitter.

At the end of the day, though, he and Twitter need to focus on what they can control. They shouldn’t worry about things they can’t control — and they can’t control what others will say about them. People will speculate on lots of things, including the imagined valuations of private companies. They’re going to do it, and Wilson needs to get over it.

What he and the folks who run Twitter can do is ensure that the company’s executives, managers, and other employees remain disciplined and focused. If they fail to maintain their focus and execute their plans, they’ll have only themselves to blame for any failure that results.

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