In the public market, a company’s value is derived from the price per share. Yonatan Stern explains that a common way to calculate market capitalization for profitable companies is through the Price-to-Earnings (P/E) ratio. A healthy company is often valued at a multiple of 15 to 20 times its earnings. For example, if a company generates $1 million in profit and the market applies a P/E multiple of 20, the company’s market capitalization would be $20 million. This creates a predictable valuation floor based on the company’s ability to generate cash.
The lectures highlight a tension between growth-based valuation and profitability-based valuation. From the Venture Capital perspective, market capitalization—especially at IPO—is often driven by growth metrics. Rapid revenue growth can significantly inflate perceived value, even if profitability is low or nonexistent. In contrast, the SmartUp methodology emphasizes profitability. A company that consistently generates cash has tangible value and is attractive as a cash-generating asset, similar to income-producing real estate.
This distinction is illustrated through a comparison between Apple and Samsung. Despite Samsung selling more phones by volume, Apple’s market capitalization is dramatically higher. Apple’s greater value is attributed to higher gross margins, a simplified product line, and strong branding. The lesson is that market capitalization is influenced not just by sales volume, but by efficiency, profitability, and business model quality.
For venture-backed startups, achieving a high market capitalization through an IPO is considered the ultimate goal, as it enables investors to liquidate shares and return cash to Limited Partners. However, Stern emphasizes that reaching a market capitalization above $100 million at IPO is statistically rare, occurring in roughly 1 out of 500 startups.
