Silicon Valley billion-dollar valuations are inaccurate, says Elad Gil

Henny
Ray Abrams/AP

• 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.”