Warren Buffett is famous for quoting his long-time mentor, Ben Graham, as saying, "In the short run, the market is a voting machine but in the long run it is a weighing machine.” In other words? In the short term, a company’s value can be determined by hype. In the long term, a company’s value is determined by business fundamentals. The same is true of startup valuations.
Often, private company valuations can represent a pulse on different hype cycles. During COVID, Hopin demonstrated a remarkable rise and fall that followed lockdown-induced commitment to virtual events, and their disappearance as soon as quarantine restrictions were lifted. From a high of $7.7 billion to a low of being bought by RingCentral for ~$15 million in cash.
Valuation reckoning has come for any number of businesses as many have struggled to live up to the 2020/2021 hype. Whether its public companies, like Robinhood, Uipath, or Twilio that saw their valuations fall from a high of $58 billion, $44 billion, and $70 billion respectively to market caps today of $11 billion, $14 billion, and $13 billion. And don’t even get started going down the rabbit hole on SPAC performance from that period. Then you have companies like Lacework, who, after having previously raised $1.9 billion in total funding, most recently at a valuation of $8.3 billion, but is now reportedly in talks to be acquired by competitor Wiz for “just $150 million to $200 million.”
Some would say these are macro trends, and every company is suffering if it isn’t within the bright hype spotlight of AI. But then you see examples like Ramp, or Rippling. Ramp, after raising at a 28% down round in August 2023, the company recently raised another round at $7.65 billion, nearly to its previous high. Rippling is reportedly in talks to raise $200 million in funding at a $13.5 billion valuation, up from $11.5 billion last year. Not every company is suffering when it comes to valuation.
Despite the high watermarks, its important to emphasize that no company is out of the woods just because they raise at a high valuation. Take Rippling, and the broader HR space as an example. With Rippling’s $13.5 billion valuation and Gusto’s last mark at $9.5 billion, there’s no shortage of highly valued companies in the space. Everyone is chasing the 900-pound gorilla in the space; ADP at ~$100 billion market cap.
While companies like Rippling and Gusto reportedly generated revenue of $350 million and $500 million respectively in 2023 or so, a similar company like Paylocity is valued at a market cap of $8.9 billion while generating $1.3 billion in 2023 revenue. Granted, Paylocity is growing ~30% year-over-year, while Rippling and Gusto are likely growing much faster, and pitching much bigger potential visions.
But the question remains for every company; in the long run, as the market becomes a weighing machine, will the company’s fundamentals and product expansion and market penetration be enough to justify the previous valuations they’ve raised at? Or will they fail to measure up?
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