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Value vs. Worth.
Why are some valuations higher than others?
My Dad once tried to explain the difference between value and worth to me. I was 8 years old looking at the stock prices in the back of the finance section of the New York times, and picking my favorites based on the very trusted system of “best ticker wins.”
It stuck in my head that there was a difference between the two, but understanding the actual difference eluded me until I became a venture capitalist. I never properly studied economics, but I definitely understood when I was 8 that I over-valued my spider-man comics compared to what someone was actually willing to pay for them. And I undervalued an economics education :)
Value is how much a customer thinks something is worth to her/him.
An item is worth something, when the market is willing to pay a price.
I’ve been a Venture Capitalist for 7 years, and never have two definitions become more intertwined, to the point that sometimes they blend and mislead everyone. If anyone was trying to point at a reason that valuations aren’t sustainable, they have to look no further!
In venture capital, the industry has aptly named the price of a company a “Valuation.” meaning we are valuing the company what we believe it to be worth, rather than what the market will actually pay for it. It’s not called “Worthuation.”
Many, many startups ask me about why certain companies raise at certain prices, and that most of them seem ridiculous right now.
The answer is the difference between “Value” and “Worth.”
When you hear the valuation of something and how much they raised at that valuation, you believe that suddenly the market believes it is “worth” that. But that just means that a small group of people believed in the value, at that time, in reference to them. In a world driven by power law dynamics, sometimes investors will concede on valuation, with the belief that the future “worth” will be vastly more, or nothing.
There is a lot of nuance to all of these things in the market. Has the investor invested with the entrepreneur before? Does the entrepreneur have previous exits? Do they have an expertise in a big market that that they are going after?
In the last 10 years there was also a value power shift that is important to note: the startup started to value itself, rather than waiting for an investor to do it for them. Legal products like the SAFE and the Convertible Note flipped the entire concept of valuation on it’s head. The fundraising process used to be about an investor, valuing your company in reference to them and their fund. Now it’s the startup valuing itself, in reference to the startup’s hopes. And that is where pricing delta exists: Somewhere between a startups hopes, and the investors check book.
I believe that the power the startup has now is great. I think that it puts in a system of checks and balances to the investors. But if the founders believe that their valuation is their worth at the time of the fundraise, it may lead to delusion. The market is competitive right now, lots of funds chasing a smaller pool of talent, but markets move cyclically, and power shifts back and forth.
It turns out I have a lot more thoughts on this, I might continue the conversation on another post.