Valuation and funding amid market confusion
"The world is not going to adapt to you...you’re going to have to adapt to the world.” — Warren Buffet
To say the world and business environment has changed significantly over the last eight months (since ROIT: Compounding cash, value, growth, and AI was published) would be quite an understatement.
The stock market has swung wildly due to news around tariffs with the VIX index reaching a high of 52 in early April (in comparison to prior highs of 66 in late March 2020 and 79 in late October 2008). Credit agency Moody’s recently downgraded the US to AAA from AA1 - a credit rating it has held since 1917. In early May, Warren Buffet announced his retirement, the timing of which came as a surprise to his known successor Greg Abel (whom he has been grooming for almost a decade). AI funding and valuations continue to be at an all-time high with forecasts predicting 25x industry growth to reach a $5TN market size by 2033; though key questions remain how energy and infrastructure can keep up. The crypto market cap has reached ca. $3TN which is comparable to the size of the entire private debt market (which began institutionalizing in 1980-1990s). Coinbase joins the ranks of the largest US publicly traded companies as part of S&P 500.
All of these data points, among others, suggest that small and big structural and systemic changes are being redesigned at their core, at unprecedented pace, making it a challenging market yet equally opportune time for entrepreneurship, innovation and growth.
With new rules being defined and industries reshaped in the process, I wanted to revisit some first principles and key learnings experienced since joining the workforce in 2007 amidst economic uncertainty. This 9-minute read is intended to frame high level thinking around business funding and capital allocation, and the resulting impact on talent and execution timelines.
In particular, the following topics will be covered:
Valuation ≠ Fundamentals (especially in volatile markets)
Money moves faster than businesses
Capital = Time + Talent (and timing!)
Are you building a Cash Machine or a Growth-to-Exit Business? Choose wisely.
1. Valuation ≠ Fundamentals (especially in volatile markets)
In formal education and analyst training, we are taught the fundamentals of cost of capital and business/asset valuation, as well as how to create an integrated financial model that takes actual performance and key assumptions into account.
There are three classical methods to value a company:
Asset Approach — What is the net asset value of a business today? Most relevant in asset-heavy businesses (e.g. real estate, energy, manufacturing) or liquidation (aka ‘fire sale’) scenarios or when cash flow is hard to predict. For a software or tech-enabled services company, this would be some combination of unique payroll, IP, and cash & equivalents.
Income Approach — What are expected future earnings and cash flows, discounted back to today based on expected cost of capital (relative to the risk-reward)? The Discounted Cash Flow (“DCF”) analysis is a method used to value businesses with strong profitability and predictable cash flow. Private equity or investors that take a “financial engineering” approach to investing will often rely on this approach.
Market Approach — What are comparable businesses valued at in current markets? How do macro and micro factors impact future growth? This approach usually relies on publicly traded or recent transaction benchmarks. It’s also heavily influenced by timing, sentiment, and the fundraise/exit process. Most early stage startups, especially in venture and growth, rely on this valuation.
Figure 1: The three classical approaches to valuation. Market sentiment often dominates in startup investing.
The theory says these approaches should triangulate a reasonable value range.
But in practice—particularly in early stage startups or growth-oriented technology companies—the Market Approach dominates. It’s faster, more narrative-driven and process-led, and often deviates meaningfully from fundamental analysis used in the Income and Asset Approaches.
When capital is abundant and competition for deals is high, market sentiment tends to inflate valuations (i.e. during 2019 to 2022). But when there is macro uncertainty and capital deployed shrinks, even fundamentally strong companies can face harsh terms and valuations. That’s because investing and forming conviction is often more emotional or “sentiment” driven.
This is why founders can experience a painful disconnect. Valuation is not about fairness, or even growth ambitions or how hard you work. It’s about what someone else believes they can resell your equity for later—and whether they think someone else will believe the same thing after them. “But our product and metrics are better than Company X and they raised Y!” Yes—but Company X raised capital in a different environment.
Market Approach only applies when the business is in a “hot and growing market” where risk-reward can be justified; otherwise Income Approach and Asset Approach prevails. Valuation is as much about proven financial performance as well as momentum, narrative, and market mood. It’s about perceived future upside and certainty around that — it is a reflection of timing and belief.
In today's tighter markets, the conversation has shifted around valuation where there is arguably a healthier balance between growth and cash conversion.
2. Money Moves Faster Than Businesses
There are a lot more businesses than investment funds. The estimate is ca. 1000:1 ratio if you compare ca. 67M private businesses vs. ca. 67K capital allocators (i.e. family offices, VC/Growth/PE, public and regulated funds) when combining Europe and the US today. That means the supply side of financial capital is disproportionately concentrated compared to the demand for it, which amplifies the power of access, timing, and control.
Financial capital follows conviction, not just diligence. It’s deployed by reference points—who else is in the deal, what round terms look like, who’s leading, in the sidelines or sitting out. That means if you’re outside the ‘deal flow’, your business might be fundamentally strong but still starved of attention and capital. Or worse, face mispricing or over-correction.
Private markets and capital (i.e. VC/Growth/PE, debt, family offices) like to collaborate or “syndicate” when risk of an opportunity is high and certainty in achieving a certain return is low (e.g. unprofitable startups) - a byproduct of business maturity and market timing. This also means that the feedback loop when it comes to perceived risk-reward is often shorter and hence faster amongst capital allocators than within a business. (NB: The exception could be situations where a business operates in a highly competitive, fast changing niche industry where its customers and partners have immense bargaining power.)
3. Capital = Time + Talent (and timing!)
From a financial architecture standpoint, return of financial capital and business growth are shaped by three interlocking levers:
Cash Conversion — How effectively does the business turn revenue into actual cash flow? Cash conversion is an important signal of quality of revenue and business scalability, and whether reported growth translates into usable capital that can be reinvested or distributed.
Operating Leverage — What are the product/service-level unit economics and business-level margins (i.e. gross profit, EBITDA)? These reflect how well a company can grow its top line while keeping its cost base relatively flat. Businesses with high operating leverage (e.g. software, asset-light models) can significantly expand margins as they grow - in theory, compounding profits (and then cash) sooner - so as long as they are also capital light.
Financial Leverage — How can a more structured form of capital be utilized to reduce dilution and boost returns to equity holders? There are different flavours of debt and preferred equity, however the intention is to lower the cost of capital for financing the “safer” parts of a business that can easily be converted to cash in a ‘worst case’ scenario (e.g. physical assets, recurring contracts, etc.)
These three levers shape how money flows through a company and how value compounds over time to shareholders.
When interest rates are low, the time value of money (aka “cost of capital” or “opportunity cost”) is relatively low; therefore investors and businesses alike are encouraged and incentivized to take more risk. That means, there is more grace when it comes to the timeline and talent required for achieving business and financial objectives.
As interest rates surged, so did the opportunity cost of capital. The time premium went up — meaning fewer bets, more proof points, and stricter margins. In a zero-rate world, all growth was good growth. In today’s world, cash has to be earned, not just raised. The ‘free lunch era’ is over — as shown by the convergence of short-term and long-term rates (see charts below).
Figures 2 and 3: Illustrative charts of interest rates in Europe and the US since 2009
Money buys time (i.e. more runway) and often, better talent (i.e. execution acceleration and certainty), but it does not always translate into efficient growth outcomes.
Understanding how macro changes impact the flow and cost of capital (both human and financial) is critical to creating a defensible GTM strategy and realistic business plan when the world swings from investing in growth potential to cash productivity.
As the cost of capital rises, so does investor scrutiny. Gone are the days of “growth at all costs” (unless you’re powering the AI revolution). Valuation now rests less on top-line potential and more on bottom-line durability. In other words: your ability to generate and recycle cash matters more than ever.
4. Are You Building a Cash Machine or a Growth-to-Exit Business? Choose wisely.
After reviewing that (i) valuation is sentiment driven, (ii) capital supply is concentrated, and (iii) growth levers are context dependent, the logical next question becomes: what kind of business are you actually building?
There are two primary archetypes:
Cash Machines aim for internal sustainability. They’re profitable, reinvest steadily, and optimize for economics and compounding over time. These businesses lean into cash conversion and operating leverage. They often scale slower but also provide the business owners & operators with the most control and flexibility.
Growth-to-Exit businesses are built for acceleration and external monetization. They attract long-term or risk-on capital with the intention of realizing value through a strategic sale or recapitalization. Their profit profile is usually back-weighted (usually targeting years 5-10 of an investment fund), more often than not dependent on expansion of enterprise value multiple, and highly sensitive to timing, sentiment, and market benchmarks.
Figure 4: Comparing the power of annual cash compounding vs. a one-time 4x exit after 10 years, with hypothetical interim valuation milestones.
For example: a business that compounds cash at 15% annually over 10 years grows to €405 on a €100 base. Meanwhile, a business bought for €100, held and sold for 4x after 10 years equates to €400. (NB: Ignoring the impact of fees, distribution waterfalls, and taxes for very simplistic illustrative purposes.) Similar headline return—but radically different risk, control, and liquidity.
This means that all things given if a business is growing 15% or less per year (top-line adjusted for cash generation), then you might be better off bootstrapping until growth takes off. In many cases, businesses with organic growth-adjusted for burn of less than 20-25% is simply not backable for institutional equity investors.
And that doesn’t account for reinvestment velocity. The cash machine allows for consistent value capture and recycling. The exit-driven strategy? Delayed and sentiment-bound.
Given today’s tighter capital environment and greater scrutiny on fundamentals, the center of gravity is shifting back toward productivity, compounding, and control. That doesn't mean IPO exits are completely off the table. But it does mean you need to know which game you’re playing and stick to it to ensure success.
The better aligned the capital strategy with the company operating model, the easier and faster it is to attract the appropriate investors, talent, and partners. There’s no wrong answer. But there is a right cultural match for your ambitions and time horizon.
We are at a critical juncture in the business and economic cycle where strategy, tactics, and execution require careful consideration, planning, and expertise. To this effect, we are collaborating with OrbitalX to surface overlooked “silver bullet” tools from business leaders who have successfully accelerated growth and exited investor-backed technology companies.
The content will be published onto YouTube - so subscribe and be on the lookout for the official release!
Are there any burning questions or key insights you’d like to share in the meantime?