I used to have a clear answer to a founder’s question, “How do you value a company?” The question is just as important in conversations within a VC partnership as with founders. A valuation must have some justification to be compelling.

Reflecting on this question a founder posed this week, I remembered how we came to be here, the three eras of startup pricing: cash-flow, multiples, and discount-to-future-value.

Cash Flow
In the aftermath of the dotcom crash, a valuation depression kept valuations low. A few months before Lehman fell, I joined Redpoint. I was taught to ask founders how much capital they needed to attain milestones and circumspect the financial model. How much money did the company need to have 18-24 months of runway? The model says $4m? Great.

Add a quarter or two of burn as an insurance policy. Voila! The art of startup pricing in a recipe. $5m on $25m post.

Multiples
In the mid-2010s, public market pricing techniques seeped into venture lingo - the same time another Wall Street peccadillo appeared in Startupland, the Patagonia vest. Startups were priced first on forward-revenue multiple. Sum the next-twelve months of projected revenue, tabulate the public comps’ forward multiple, and multiply.

Forward revenue multiples gave way to forward ARR multiples. ARR figures are more aggressive still. They are the run rate of a business, not recognized revenue. But, these startups grow faster than the public companies so the market should give them the benefit of the doubt.

The market priced companies at 10x forward ARR, and as the venture asset class grew from $30b to $300b+, forward ARR multiples eclipsed their double-digit roots and grew by an order of magnitude. Last year, 100x, 200x, and 400x multiples graced term sheets and greased board room approvals.

Discount-to-Ultimate-Value
That 10x growth marked the start of the third era: forward multiples in the hundreds had lost the credibility to justify valuations. Instead, the market evolved to discount to ultimate value.

If Salesforce is a $200b company and a CRM startup captures 1% of Salesforce’s market, the startup’s a unicorn. If we buy 15% of that company for $10m, we can make a 10x. Home-office rodeo redux. Web3/crypto startups are often priced this way. Ethereum sits atop a $350B market cap perch. 1% of Ethereum for the next L1 means a $3b company, a triplicorn.

But when the valuations of these comparables fall significantly, say more than 60% as software publics have, the initial investment case and price justification suffers. The startup needs 60% more market share to be worth the same.

Today
With $200-300b invested in venture capital this year, the dominant pricing force remains abundant capital supply seeking limited investment opportunities. Since only one VC establishes the market-clearing price, valuations can remain elevated, a phenomenon extant in the early stage market..

Justifying a price is now some combination of these three depending on the company, the auction pressure, and the public market comparables, and the investment philosophy of the VC.

That’s why startup pricing is so uneven, murky, and sometimes gobsmacking. The market isn’t aligned on a pricing rubric. We’re in between pricing eras.