The Valuation Reset

By 20VC

Categories: VC, Startup

Summary

Valuations are undergoing a massive reset, shifting from growth-focused to free cash flow-based. Companies must prepare for years of flat stock prices before reaching 10-15x FCF multiples.

Key Takeaways

  1. Companies shifting from revenue multiples to free cash flow valuations will face a significant 'valuation reset'.
  2. Growth companies may be compared to banks, utilities, or industrial companies, requiring years of flat stock price and reasonable growth to reach 10-15x free cash flow multiples.
  3. Founders must plan for the transition from growth-focused to free cash flow-based valuations, as the market's perception of the company shifts.
  4. Investors should reevaluate their portfolio companies' valuation models, considering free cash flow metrics in addition to revenue multiples.
  5. Tech professionals should stay informed on the evolving valuation landscape to better advise founders and understand industry trends.
  6. Companies must focus on building sustainable, profitable businesses to navigate the valuation reset and maintain investor confidence.

Related topics

Transcript Excerpt

When companies shift from being valued on revenue multiples with no deduction for loss, totally ignoring option dilution, all the way to being valued on free cash flow and, you know, where they're basically deducting SPC, it's just such a huge change. It's such a valuation reset that if you go into that valuation reset and the market suddenly stops thinking of it as a growth company and starts thinking of, let me compare you to a bank or a utility or an industrial company, it takes a lot of years of flat stock price and reasonable growth before you can be worth 10 or 15 tons free cash flow.…

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