Here’s three things valuation is not:

• Based on verifiable inputs


• Provably accurate in output


• A mirror of market sentiment

Instead, valuation is always an opinion based on a set of assumptions about an unknowable future.

“People act like it’s an award for past behavior. It’s not. It’s a hurdle for future behavior.”

Bill Gurley, VC at Benchmark

When one investor states that a company is overpriced, and another that it is undervalued, neither is right or wrong in the moment — they just have differing opinions.

Valuation can be a simple, implicit part of the process, or it can be an explicit exercise used to better understand an opportunity and check assumptions.

Valuation is the rationale by which you determine which opportunities to pursue. To develop your understanding of valuation is to develop your ability to recognise potential.

Despite the central role in investment decisions, valuation is often misconstrued as financial engineering or market-driven pricing exercises.