Why Pre-IPO Valuations Are Often More Hype Than Reality
In the world of startups, valuations can feel like Monopoly money—until someone tries to cash out. I’ve seen it firsthand in over 2,000 venture-backed companies I’ve valued: the closer you get to an IPO, the more disconnected the numbers become from reality. Let’s talk about why that happens, and what you should watch out for.
The $80 Billion Mirage A friend of mine works at Arabian, a startup that hasn’t delivered a single car yet but is gearing up for an IPO with an $80 billion valuation. To put that in context, General Motors is valued similarly and sells over seven million cars a year. The numbers just don’t add up. But Arabian is still likely to accept that valuation, because in the IPO game, perception can be more powerful than production.
Honestly, when I heard the figure, I started picking out my boat—because this kind of valuation isn’t about performance. It’s about hype.
How Venture Capital Fuels the Fire Here’s how the venture capital model works: investors fund 100 startups, double down on the 10 that gain traction, and hope one hits it big. In every funding round, the startup’s valuation is expected to increase—often three to five times—even if the underlying business hasn’t changed much. Why? Because VCs need those paper gains to show progress on their assets under management.
As long as the company is still private, those valuations can be built on future hopes instead of present facts. And since there’s minimal regulation in private markets, you get sky-high unicorn valuations with little accountability.
When the Curtain Drops: Post-IPO Reality The IPO is where fantasy meets accounting. Once public, traditional valuation methods take over: income-based, market comparables, and cost-based approaches. Suddenly, the story isn’t enough. Look at WeWork. Valued at $47 billion pre-IPO, it dropped to $12 billion within six months—then down to $9 billion. That’s an 80% loss.
When I valued WeWork, I pegged it far lower. But the VC on the other side insisted I bump it up 60%. Why? Because they needed the markup to justify their investment.
The Hollywood Set Analogy IPO valuations can be like movie sets—they look impressive from one angle, but there’s nothing behind the facade. Before investing, ask yourself:
- How much of this valuation is based on actual revenue or profit?
- How does this company compare to similar businesses in the same industry?
If the answer to both is “not much,” you’re probably buying into a script, not a solid business.
Advice to Founders and Investors If you’re a founder, don’t chase inflated valuations for the headline. It might help in the short term, but reality hits hard when it’s time to IPO or sell.
If you’re an investor, understand that private valuations can be a performance, not a balance sheet. And once that curtain lifts, the numbers have to make sense.
All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.
