Why the ‘Art’ of Startup Valuation Can Never Become a Science
February 25, 2022
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by Stephen Kanyi

Valuing startups is an ‘art’ whose mastery has proven to escape most who engage in it. Only 30% of venture investment portfolios yield a reasonable profit. And no matter what anyone says and whatever you’ve heard, there is simply no way to predict which startups will grow to become the next unicorns. Not even the legendary Marc Andressen can tell you that. And why then, you might ask, are so many people engaged in this fool’s errand?

A simple answer might be just for the thrill of it. It’s the same thrill that pushes millions to try their luck at the lottery.

You see, much like the lottery, the industry that is venture investment is built on a lie. A lie that both investors and entrepreneurs tell themselves to justify thousands of millions of dollars going into an enterprise that has yet to yield a dollar in profit or even have a working prototype.

The lie is: the venture is one day, maybe years or even decades later going to pay off. One day the exit price is going to justify the millions of investments and years of patience. Investors do not see this ploy as a lie or a fool’s errand, rather, a very clever bet, one that is going to make millions of them.

Seed stage startups are by every reasonable metric or methodology worth less than zero. With no product release, regardless of the number of rounds they’ve raised, there is no certainty that they will ever become valuable. They will just keep losing money until a product is released.

Moreover, there is no certainty that the product once launched will be a hit. The odds of success for a startup, no matter how revolutionary or promising, are always much lower than their chances of going bust.

The odds are not better for early-stage startups who face a harder task of proving the viability of the product and hence the business as a whole. After the product release, and regardless of the number of rounds of funding, the future of the business is wholly dependent on its scalability. ‘Growth’ is always the magic word in business, one that the whole business has to prove it can achieve.

But how many can really master the art of growing customers/users that will justify another significant round of funding? Very few, in fact by this point have given up or just went bust. Others just get stuck in limbo, with just enough users to remain marginally viable but not enough to attract more funding.

But this is what innovation is all about, building and inventing a lot of stuff, most of which no one really needs but few which a lot of people really want.

A Growing Enterprise

Whatever my criticisms of venture investment, it is what keeps innovation and hence technology going. Moreover, recent data indicates that the pace of startup value creation has been growing, by a lot, reaching fever pitch in 2021.

Startup equity that was very low in its early stages reached its highest last year and since maintained these heights.


Well, PitchBook cites “rising inflows of nontraditional capital to the startup market as part of the changing landscape for startup prices and the pace at which they create illiquid equity value. Larger venture capital funds are also a driving force behind the pricing dynamics uncovered by the data.”

In short, there is money in the game. This means that startups are becoming more valuable as more and more investors put faith in their viability.

Does this mean that startups are getting better at growing their customer bases, revenues and hence profits? The data doesn’t indicate so. What it shows is that success stories like Amazon, Meta, Netflix, Airbnb are pulling more investors to Silicon Valley. And as a user who has benefited a whole lot from the products that come from there, I can only cheer them on. They push the pace of innovation forward, albeit based on a lie.

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