Business owners/managements, more often than not, are intrigued and pensive about the valuations that their businesses get / deserve. Whether or not this is appropriate is a separate discussion (for my opinion on this subject, read this: https://consultantcapitaladvisor.com/2018/08/08/if-tesla-thinks-this-way-then/).
Anyways, back to the topic under discussion.
Business lifecycles have shortened, thanks to innovation and technology playing a vital role in disrupting traditional business cycles. And as a business owner, it becomes increasingly important to not only acknowledge this transition but to learn how to respond to it.
I came across a very interesting talk by Professor Aswath Damodaran. This presentation (attached herewith) was made by him at the Nordic Business Forum 2018, which attracted 7500 participants (CEOs, enterpreneurs and top executives) from around 40 countries. Professor Damodaran is the Kerschner Family Chair Professor of Finance at the Stern School of Business at New York University and is widely acclaimed for his deep knowledge on a variety of subjects like valuation, portfolio management and corporate finance.
In my opinion, this presentation proves to be extremely helpful to business owners and investors alike.
As a business owner, this presentation should help us
- Understand what a business life cycle is and figuring out where our company is positioned in this lifecycle
- The strategies we need to initiate depends primarily on this positioning, making it predominantly important to identify this.
- Understand how our focus should change while traversing this life cycle
- Understand what can help fetch better valuations for our company
- by embedding a good ‘story’ in our business model, and
- by delivering numbers, of course
- Understand what are the pre-requisites for a CEO during this lifecycle
As an investor, this presentation should help us categorise our portfolio stocks (or the ones under our tracking) better. An insight into where our stock is positioned in its business life cycle and its effective response by their managements would help us weed out the companies that manage to sustain business cycles from those that are set to underperform/perish.
This crisp and lucid presentation makes up for an interesting read and provides valuable inputs, which I’m sure you will find useful.
But from amongst the takeaways from the presentation, the one which stuck on my mind was the valuation parameter which he spoke about. While talking about how every number that he uses for his valuation needs to have a ‘story’ embedded in it and vice versa, he cited a very interesting example of Uber to explain his theme about valuations and stories. Prof Damodaran had apparently valued Uber at $6bn, on the premise that it was a ‘urban car service’ company. That the company positioned its story as a ‘logistics’ company, not only urban but everywhere having local and global networking benefits, it not only tripled the size of the opportunity but help expand valuations to $53bn!!! What separated this valuation differential, according to Prof Damodaran, was the ‘story’ being told. As he goes on to summarise this topic, he says “for young companies, your story will define your valuation”. On the face of it, the statement may seem quite apparent. But, it’s worth pondering over. I’m sure you get the drift.
What words a business owner chooses to describe his/her business would go a long way to determine what valuations their business eventually gets.
I would love to hear your views on this.