Valuation Essentials: 3 Key Observations on Metrics that Matter

As part of the Metrics That Matter series, we’ve written about three analyses to track the path to profitability and two metrics to calibrate retention and expansion. These metrics serve as both outputs and inputs. They are outputs from the activities of people at companies working hard to create compelling products, distribute them to customers, and drive the business forward. They are also inputs to valuation, a topic especially pertinent in today’s market.

We are fast approaching the two-year anniversary of an all-time high for the S&P in January 2022. After a tumultuous 2022 and 2023, the S&P rallied in November and is now re-approaching the high, with valuation multiples also coming back due in part to the rise of the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla), as well as investor optimism around the potential for interest rate cuts.

Given the whiplash, founders, operators, investors, and analysts alike are left wondering how to think through valuation in anticipation of 2024.

Over the years, there has been some widely praised and well-researched classic literature on valuation, but these guides can be hundreds (or thousands) of pages, often leaving readers overwhelmed.

With that in mind, here are three practical observations on valuation for founders:

1. Interest rates govern public and private company valuations.
2. Focus on durable, high-quality revenue growth.
3. Valuation is driven by sentiment in the short-term and fundamentals in the long-term.

   Interest rates govern public and private company valuations