Intrinsic Value in a World Obsessed with Multiples

Photo by Micheile Henderson on Unsplash

For years, valuations were driven by growth narratives rather than real earnings. Now, as markets tighten, intrinsic value is back in fashion. What does this shift mean for founders and investors?

For much of the past decade, companies were judged on how fast they could grow, not on whether they could generate profit. Revenue multiples – the shorthand of venture capital – reached extraordinary heights. By January 2022, software companies were trading at 13.4× revenue. Just a year later, those multiples had collapsed to 5.7×. The tide had gone out, and many business models were left exposed.

Warren Buffett draws the distinction simply:

“Price is what you pay. Value is what you get.” – Warren Buffett

The difference is more than semantic. Price is determined by sentiment and scarcity. Value comes from the cash a business can generate over its life. For too long, investors forgot the difference. Oscar Wilde once quipped that a cynic is someone “who knows the price of everything and the value of nothing.” In recent years, the market played the cynic.

The rise and fall of multiples

Cheap capital after the financial crisis encouraged investors to reward top-line growth. By 2021, only around one in five US IPOs was profitable. The logic was that profits could come later. Some did. Many didn’t. Companies like Zoom and Peloton soared on pandemic demand but found their valuations unsustainable once growth normalised.

As interest rates rose, investors reassessed. Cash flows became king again. In India, a survey showed 62% of founders in 2023 prioritising profitability over growth, a reversal from the exuberance of just a few years earlier. Globally, investors began asking a new question: not how big can this become, but how soon can it sustain itself?

Drucker’s test

Peter Drucker argued that the purpose of a business is to create a customer, but he also acknowledged that profit is the test of survival:

“Profit and profit alone supply the capital for tomorrow’s jobs and social services.” – Peter Drucker

Profit is not the purpose of a business, but it is the proof that the model works. A company that never reaches profitability is not a business – it is a project subsidised by others.

Intrinsic value in practice

• Amazon’s long game. For years, Amazon ran at a loss, but Jeff Bezos emphasised cash flow and return on invested capital. Its intrinsic value became clear once AWS and the marketplace matured into cash engines.

• Mailchimp’s discipline. Bootstrapped and profitable early, Mailchimp showed that steady cash generation can build immense value. Its $12 billion sale to Intuit surprised many, but intrinsic value was always there.

• WeWork’s lesson. A valuation once pegged at $47 billion collapsed when the absence of profits was laid bare. Price without value is illusion.

What founders and boards can do

1. Build for cash, not vanity. Metrics like GMV and DAUs are helpful, but cash pays the bills.

2. Understand your financial engine. How do costs scale? When do margins improve? Intrinsic value depends on these answers.

3. Be conservative. Higher interest rates mean future profits are discounted more steeply. Plans must reflect that.

4. Communicate substance. Investors are once again looking for discounted cash flow models, not just TAM slides.

Benjamin Graham wrote that in the short run the market is a voting machine, but in the long run it is a weighing machine. The weighing has returned. Founders who understand intrinsic value will find themselves on sturdier ground than those still chasing multiples.