There's a big problem with the way Silicon Valley values billion-dollar companies, says longtime tech investor
- Former Twitter vice president and longtime Silicon Valley investor Elad Gil has recently written a book about late-growth companies called High Growth Handbook.
- Gil suggests company founders should approach high company valuations with caution, and says Wall Street thinks about value very differently from venture capitalists.
Former Twitter vice president and longtime Silicon Valley investor Elad Gil has spent a lot of time considering what drives a company's value. He's recently written a book dedicated to the subject of company growth, called "High Growth Handbook," which details how a growing company can retain great leaders, manage its resources effectively, and maintain its value longterm.
One of his key pieces of advice deals with how leaders of growing companies think about their business's value.
According to Gil, it's typically not in a company's best interest to over-optimize value.
He writes, "When a founder has a multi-billion-dollar valuation two challenges arise: 1) the founder may push unsustainable growth at all costs to hit the valuation and 2) a lot of distractions arise that may not help the business (e.g., press, speaking opportunities, investments, etc.)."
Silicon Valley's up-and-coming CEOs might be too distracted seeking coveted unicorn status to realize that a billion-dollar valuation presents a mire of potential pitfalls.
In an interview with Business Insider, Gil suggested there's an inherent disconnect with the way Silicon Valley considers worth.
"Fundamentally, when all is said and done, the way that businesses work best in the long run, is in the cashflow they bring in," Gil said. "In the really early days, it's about the startup, the team, and the potential. As you grow the company, you start hitting different milestones, in terms of revenue."
With more and more companies achieving unicorn status all the time (already in 2018, more than 15 growing companies are estimated to be worth $1 billion or more), Gil says they should consider the way traditional financial institutions define worth.
"Look at the way Wall Street looks at a company," said Gil. "They should think about cashflow and leave it at that."
Of the companies that have achieved billion-dollar status in recent months, Gil suggests their 7-figure estimations might not be entirely accurate.
"Maybe only half should be valued that high," said Gil. "Not all are over-valued, though. The most valuable companies might look overvalued at the time, but sometimes they look cheap in hindsight."
"Some people say that running a startup is like going to war. It's hard to see what the future really holds if you have a smart investor telling you that your company is worth a lot. You might think that it's a good idea to raise at a high valuation."
When considering company value, however, Gil says that it's best to back it up with hard numbers.
"Public investors approach value very differently," he said. "They'll assess you on different metrics. Your valuation might be true until there's public scrutiny, and you don't know what you'll be valued in a public market."