Customer Value vs. Company Valuation
What do people say about you when you are not there? I often wonder. Our reputations are built upon our actions and how people perceive what we do. For companies this includes how we treat our customers, our teammates, and our communities. Big reputations are often built on stories about endgame. The tales that startups tell are merely promises — usually little of meaning has happened yet. The promise is instead of what may come from future actions.
This is why I believe early-stage software companies should act more and say less.
Customer value is usually defined as the benefit generated for a group of people. Some might shorten this definition to “what people pay for.” But realistically customer value covers much more than a one-time monetary exchange. Saved time, improved reputation, reduced cognitive load, efficacy of support — these are all components of customer value.
Company valuation is the process of evaluating the economic worth of a business. The method varies across industries and is highly dependent on the valuator. For early-stage software companies without historical profit and loss to review, the analysis tends to put greater weight on the story being told, the potential value of the market, and comparison to other companies.
Unfortunately, customer value and company value were not highly correlated in most startups over the last 10 years.
Company valuation was more about how much money you raised than how well the business actually performed. But the recent shifts — while painful for many — pulled us back towards the importance of customer value. Just look at global IPOs. We went from a scorching pace to a freeze, with activity cut in half between 2021 and 2022. The total amount offered in the IPOs of 2022 fell to $179.73 billion compared to $626.56 billion in 2021. So far this year is looking just as chilly.
The cold can be refreshing though. It takes a certain hardiness for software companies to thrive in down times. So with fresh thinking about how customer value and company value differ, it is helpful to consider how different groups are contending with the current market environment:
Customer value is the heartbeat of entrepreneurship. Founders who want to build lasting companies and create tangible value for everyone involved know that customer value must come first. But they also know that if they want to raise capital that they are effectively selling a part of the company, so its value is important too. Tougher times focus the founder's mind on what is essential. Creating customer value is a virtuous cycle — the more that you deliver, the more your company is truly worth.
The best folks are drawn to the startup adventure by the opportunity to contribute towards something meaningful. Team members have more opportunities to do this well in an organization centered around customer value than one chasing company valuation.
This one should be obvious. Customers do not really care about company valuation. But when we were so upside down in our thinking about what success means to a startup, a lot of the money raised went to splashy marketing campaigns that revealed little about what a product actually did or even looked like. Customers want to know what benefits they can expect to gain from choosing you — not the other way around.
Go-go times are full of VCs who are happy to focus on company stories and the prospect of big returns. When things slow you see more scrutiny — more massive write downs, more quiet cutting of valuations. This whipsaw approach can lead to even bigger gains for some as valuations plummet. But for the most part, customer value is valuable again because it leads to greater capital efficiency and longer runways for companies.
The businesses we build impact the communities in which we live. And for communities to thrive, you need economic development. Valuation was a false flag here for many years. You need only look at the big empty office buildings in tech centers like San Francisco to see that. Sustainable companies offer meaningful employment and generate tax revenue. Prioritizing customer value is the best path towards that.
The success of any business — but especially a software company — should be measured not by its valuation, but by customer value.
When you look at the breakdown of the groups above it is easy to see that most VCs and some founders have historically focused on valuation. But that has recently and rapidly changed to a collective emphasis on customer value. The idea that there will always be another banker ready to invest in a company’s exciting story is not just problematic — it is no longer possible.
Today we are seeing a company’s worth through the lens of product-market fit and how many customers are actually paying for its products. Value-based product development and sustainable business practices are driving meaningful businesses that will last through this downtown. After all, our reputations depend upon it.
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