The 'dean of valuation' debunks how 'price' is different from 'value' and why most venture capital firms are incapable of valuing companies
Let me begin with a confession. ‘Valuing a company’ and ‘pricing a company’ are as different as chalk and cheese in investing. But unknowingly, I often use the two terms interchangeably. Here’s where the masterclass with professor Aswath Damodaran on Forbes India Pathbreakers helped me understand why the two are not the same. “Most people price things, they don’t value them,” the dean of valuation explains. “In pricing, you attach a number to an asset based on what other people are paying for similar assets. Valuation, on the other hand, requires that you understand a business.”
For example, most venture capital (VC) firms claim to value companies on the basis of the future growth potential of the business, in other words, the addressable market size of consumers or subscribers. However, this hypothesis can often be quite far-fetched and misleading. “VCs don't value companies. They're incapable of valuing companies... I don't expect VCs to have deep thoughts about businesses because they're interested in whatever metric will allow them to flip the company to other people at a higher price,” Damodaran says.