What factors affect valuation?


Factors affecting valuation are varied and can be classified into several categories:

  1. Macroeconomic Variables:

    • Interest Rates: Low interest rates reduce the cost of capital, potentially increasing valuations, while high rates can decrease them. In a low-rate environment, investors might turn to stocks for better returns, thus increasing the demand and PE ratios 1.
    • Inflation: Low inflation typically accompanies low interest rates, leading to lower growth projections. As inflation rises, companies can raise prices, which can impact their valuations 2.
  2. Market Conditions:

    • General Investor Mood: Bull markets often lead to peak valuations, while bear markets see compressed valuations. Investor sentiment can significantly influence the willingness to pay higher prices for stocks 1.
    • Competitiveness of Investment Deals: In venture capital, highly competitive deals can drive up valuations, especially for startups perceived as potential "super unicorns" 3.

      Price Earnings Factors

      Brian explains how the price to earnings ratio can be affected by factors such as interest rates and general investor mood. During bull markets, valuations are at their peak, while during bear markets, valuations compress.


      200 | Stock Fundamentals with Brian Feroldi
  3. Company-Specific Factors:

    • Growth Rate and Market Size: For startups, the growth rate and market potential are critical. High confidence in growth and market size can justify higher valuations despite high initial cost 4.
    • Customer Base and Profitability: Increasing customer numbers and maximizing lifetime gross profit can enhance a company's value. The risk factor, or the likelihood of sustained performance, also plays a crucial role 5.
  4. Valuation Models:

    • Insulation from Macro Variables: Some valuation models attempt to minimize the impact of macroeconomic factors by adjusting growth rates and cost of capital accordingly 2.
  5. Entrepreneurial Factors:

    • Experience and Capability of Founders: First-time entrepreneurs might attract lower valuations compared to those with successful exits. Experienced founders can command higher valuations due to perceived reduced risk 6.
  6. Ownership and Stake:

    • Investment Stake: Early-stage investments often involve lower stakes due to higher perceived risks. The passion and energy of investors towards the company can also influence valuation negotiations 7.

These factors illustrate that valuations are influenced by a complex interplay of macroeconomic conditions, market trends, company-specific dynamics, and the profiles of entrepreneurs and investors.