On Valuations, Stop Looking at the Outliers

Like most of you, I’ve been searching for some numbers to make sense of the private tech market, the dollars flowing in and the upward pressure on pricing.

And while I haven’t devised one perfect indicator, I have concluded that the method many people are using to evaluate whether the market is overpriced is deeply flawed.

Intentionally or not, industry professionals, reporters and others tend to fixate on the outliers, specifically the rising valuations of a handful of companies over the past year—Uber from $3.5 billion to $19 billion; Snapchat from less than a $1 billion to an attempted $10 billion.

I’ve written before about how these headline numbers fail to represent the fundamentals of the company and shouldn’t be reported without consideration of the preferences investors get in those rounds. 

But focusing on them is problematic for another reason: These companies don’t represent any true sense of the aggregate pricing of the sector.