How Do Private and Public Valuations Differ?

TL;DR

Private and public valuations can differ because public investors assess a company’s current financial evidence and forward outlook without anchoring on earlier funding rounds. Private investors may assign more value to a broad future vision, while public investors often demand visible revenue, growth, and proof points before granting premium valuation credit, especially in risk-off markets.

Transcript

Hi, everyone. Welcome to the a16z podcast. I'm Sonal, and today we have three guests who are actually really two guests at a time because we're sort of doing a hallway conversation style podcast. That was actually some of the original spirit behind some of the original podcasts, and we thought it'd be great to share some of our internal conversatio... Read More

Key Insights

• Public investors are not anchored to previous private funding rounds because they focus on the company’s current forward outlook, market opportunity, potential upside, and investment risks. They independently determine whether to participate in an IPO and the price level at which participation makes sense.
• IPO valuation has no single objective formula because investors can favor different analytical frameworks. Some rely mainly on revenue multiples, while others emphasize EBITDA multiples or discounted cash flow analysis, producing different conclusions about both the appropriate offering price and subsequent trading value.
• Square’s valuation depended on how investors classified its business. Most current revenue came from transaction processing, but the larger future opportunity involved software, data, and value-added services that could strengthen its competitive position and support margin expansion.
• Public investors often require financial proof before awarding a premium multiple. A software and data strategy receives stronger valuation credit when meaningful revenue, growth, and supporting evidence are already visible in the financial statements and prospectus, rather than existing primarily as a future ambition.
• Private investors can value a company around a broader long-term thesis because venture capital seeks large standalone opportunities with the potential for competitive scale at maturity. That approach can produce a valuation based more heavily on an anticipated future business model than current revenue composition.
• A lower public valuation does not automatically invalidate an earlier private valuation. The private round may have reflected forecasts, expectations, and business conditions from a different point in time, while IPO investors evaluate the updated company outlook and the evidence available when the offering occurs.
• Business-model transitions earn forward valuation credit when investors can see sufficient traction and supporting data. Splunk’s movement from perpetual licenses toward recurring revenue gave investors evidence of progress and helped them accept a broader market opportunity beyond the company’s earlier logging focus.
• Market conditions influence how aggressively investors value IPOs. In a risk-off environment, public investors become more discriminating and less willing to participate, making them more likely to prioritize demonstrated financial performance over uncertain future expansion or a newly proposed category.

Questions & Answers

Q: How do private and public company valuations differ?

Private valuations may reflect a venture investor’s belief in a broad future opportunity, competitive scale, and a business model that has not yet become the company’s main revenue source. Public investors examine the updated forward outlook and visible financial evidence without anchoring on prior rounds. They may therefore assign less value to an unproven future business and more value to current operations.

Q: Why can an IPO price fall below the last private valuation?

An IPO can price below the last private valuation because public investors independently assess the company’s current business, forecasts, market opportunity, and risks. They do not necessarily treat the earlier round as a valuation anchor. Different market conditions, updated expectations, and limited evidence for a future business model can lead them to demand a lower price than private investors previously accepted.

Q: Is there a formula for valuing a company at its IPO?

There is no single formula that determines an IPO valuation. Investors may use revenue multiples, EBITDA multiples, or discounted cash flow analysis, and some may dismiss certain methods entirely. Even when investors review the same company, their assumptions about future margins, market size, growth, and appropriate methodology can produce a wide range of acceptable prices and trading expectations.

Q: Why was Square difficult for public investors to value?

Square presented investors with two possible valuation identities. Its current revenue was primarily associated with payments and transaction processing, while its future growth opportunity was framed around software, data, and value-added services for businesses. Investors had to decide whether to value the demonstrated payments business or grant a premium for a platform strategy that represented a smaller share of current revenue.

Q: When do public investors give credit for a future business model?

Public investors are more likely to give forward credit when a developing business model is already supported by visible revenue, growth, and other proof points. Evidence in the financial statements and prospectus makes the transition more credible. Without that evidence, investors may value the company according to its established revenue base instead of assigning a premium for management’s longer-term platform ambitions.

Q: Does a lower IPO price mean private investors were wrong?

A lower IPO price does not necessarily mean private investors were wrong. Earlier investors evaluated the company at another point in time, using the business performance, forecasts, and expectations then available. They may also have invested around a broader long-term thesis. Public investors assess a new forward outlook and may require current evidence before accepting the same assumptions or valuation premium.

Q: How does a business-model transition affect IPO valuation?

A business-model transition can support a stronger IPO valuation when investors see enough traction to believe the new model is taking hold. Splunk was discussed as a company moving from perpetual licensing toward recurring revenue. Supporting data helped investors grant more forward credit and accept the possibility of a larger market beyond the company’s earlier position in logging.

Q: How do market conditions affect IPO valuations?

Market conditions shape investors’ willingness to accept risk and participate in new offerings. In a risk-off market, investors become more discriminating and participate less readily in IPOs. Companies may then receive less valuation credit for future software, data, or platform opportunities unless those opportunities are already reflected in revenue, growth, financial statements, and other observable business evidence.

Summary & Key Takeaways

• Private and public investors may value the same company differently because they work from different information, time horizons, and investment theses. Public investors analyze the forward business outlook presented during the IPO process, select their preferred valuation method, and decide both whether to participate and the price they will accept.

• Square’s valuation debate centered on whether it should be treated primarily as a payments company or as an emerging software and data platform for businesses. Because most current revenue came from payments, public investors favored evidence visible in the financial statements rather than awarding a premium based mainly on future platform potential.

• A lower IPO valuation does not necessarily prove that an earlier private valuation was wrong. Private investors may fund a large, long-term vision, while public markets may require measurable transition evidence. Market conditions also matter, with risk-off environments making investors less willing to participate in IPOs or credit unproven growth narratives.