Every boardroom has its drug of choice. Some crave revenue growth, others margin expansion. But the most addictive of them all? Valuation multiples.
Founders, promoters, investors – everyone loves bragging rights: “We’re valued at 10x, 20x, 100x.” Multiples have become the modern narcotics of business – intoxicating, exhilarating, and dangerously misleading.
The Narcotic Effect of Multiples
Multiples feel good because they’re simple. 15xEBITDA. 5xsales. A single number that supposedly sums up years of sweat, risk, and creativity.
But here’s the twist: multiples measure sentiment, not substance. They reflect market mood, not business model strength. They rise when optimism is high and crash when reality shows up.
As Aswath Damodaran, the “Dean of Valuation,” once said: “A valuation is a bridge between stories and numbers.” The trouble is, most companies obsess about the numbers and forget the story.
The Fallout of Obsession
Valuation addiction breeds three deadly behaviours:
1. Cosmetic Growth: Pumping topline through discounts and debt, while ignoring profitability.
2. Narrative Inflation: Selling investors grand visions but starving the business of execution discipline.
3. Short-Term Highs: Playing quarterly games to sustain multiples, while long-term value silently erodes.
The Antidote: Value Creation
Real value isn’t built in pitch decks or analyst calls. It’s built in:
– Customer Stickiness: retention is the best multiple.
– Brand Trust: reputation compounds faster than revenue.
– Talent Depth: a strong team is worth more than strong ratios.
– Innovation Pipelines: tomorrow’s cash flows are born in today’s experiments.
– Governance & Resilience: the boring stuff that saves companies when storms arrive.
True valuation is a lagging indicator of these levers. Ignore them, and the “X” in your multiple will become an ex-valuation.
The Promoter’s Playbook
Instead of chasing the next valuation high, ask:
– What real value did we create this year?
– Would our customers miss us if we disappeared tomorrow?
– Are we compounding goodwill faster than we compound revenue?
– Does our annual report highlight numbers or narrate vision?
Closing Thought
Valuation obsession is like sugar – sweet, addictive, and ultimately destructive in excess. Value creation is nutrition – slower, steadier, and life-sustaining.
So, the next time your banker pitches you a shiny multiple, remember:
multiples are mood swings; value is muscle. And only muscle lasts.