Both Prices Were Reasonable. The Mistake Was Comparing Them.
Some time ago, an entrepreneur who was trying to sell his company told me, with obvious frustration, about the offer he had received.
"Ten years in business, half a million euros in net profit every year, and they're offering me the same valuation as a bunch of kids with a PowerPoint. Someone must be taking the piss."
From what I understood, his company had been operating for more than a decade. It had started as a small limited company with just €3,000 in share capital, and through years of hard work he had built it into a business generating several million euros in annual revenue and close to €500,000 in net profit.
He had hired an advisor, launched a competitive sale process and received a couple of offers of around €5 million—roughly 10x the previous year's net profit.
Meanwhile, in the very same industry, a startup with little more than an MVP, a handful of signed customers and monthly revenues barely exceeding €10,000—while burning cash at an impressive pace—had just announced a €1 million seed round backed by three venture capital funds. He assumed the company had been valued at around €5 million.
To him, there were only two possible explanations.
Either the venture capital market had gone completely mad, or the buyers had significantly undervalued his company, ignoring its history, market position, customer base and everything he had spent years building.
In the end, his sale never happened.
As diplomatically as I could, I suggested there might be a third explanation.
Both prices could be perfectly reasonable at the same time, simply because they were valuing two completely different things.
In fact, they weren't even operating in the same market, despite belonging to the same industry.
The venture capital funds investing in that startup were not buying a company.
They were buying an option on a possible future.
The mathematics of venture capital is portfolio mathematics.
A VC fund might make thirty investments, fully expecting that twenty will fail—or survive as zombies—eight will produce decent returns, and only two will become genuine fund returners, investments capable of returning the entire fund on their own.
When those investors agreed to value the startup at €5 million, they were not saying:
"This business is worth €5 million today."
What they were really saying was:
"If this becomes one of our two winners, perhaps it could be worth €150 million one day. We're willing to accept a very high probability of losing everything—in reality, just over €300,000 per VC—in exchange for that lottery ticket."
The buyer offering €5 million for the entrepreneur's business was doing something entirely different.
They were buying cash flows that already existed, betting—with much greater confidence—that those cash flows would continue into the future and repay their investment.
If the buyer happened to be a strategic acquirer, they were probably also factoring in additional cash flow improvements through operational synergies.
They were paying for certainty—not possibility.
The venture capital funds were buying a lottery ticket.
The acquirer was buying something much closer to an annuity.
Comparing the two valuations simply because both happened to be €5 million is like being outraged that an unproven racehorse costs the same as a productive dairy cow.
The horse might one day win the Grand National—or never finish a race.
The cow produces milk every day, even if feeding it, milking it and paying the vet isn't free.
They're different assets, carrying different risks, bought by different people for completely different reasons.
The identical price is nothing more than a coincidence.
There's another nuance—and, to me, it's the most important one.
The startup founder could never have sold the company for €5 million.
Not even close.
Nobody in their right mind would have bought it for that price.
If that founder called me tomorrow asking me to run a sale process—and I've had conversations exactly like that with startups at a similar stage—and told me they wanted to sell the business for several million euros, the discussion would be over very quickly.
Well... unless it happened to be an AI startup. In today's market, €5 million might even look cheap.
The key point is that the €5 million valuation existed only within a very specific investment agreement.
It was the price attached to a minority stake issued through a capital increase—a cash-in, not a cash-out—probably including liquidation preferences, while the founder remained locked into the company for years through vesting provisions.
The venture capital funds had not paid €5 million for the company.
Together, they had invested €1 million for 20% of a vehicle designed either to deliver a 50x return or fail completely, protected by contractual terms ensuring they recover their money before anyone else if things don't go according to plan.
A funding-round valuation is a contractual construct.
It is not a market price.
The entrepreneur's €5 million offer, by contrast, represented real money for 100% of the company.
Money that would land in his bank account.
Money leaving the buyer's account.
There is another factor that many sellers underestimate.
When someone acquires control of a company, they also inherit all its risks—both past and future.
Suppose the company receives a lawsuit tomorrow over something that happened three years ago.
Or a labour inspection uncovers employment practices dating back four years.
Those problems immediately become the buyer's problems.
It's true that acquisition agreements typically include representations and warranties designed to allocate these risks back to the seller.
In practice, however, they rarely eliminate every exposure.
Just ask Delivery Hero.
After acquiring Glovo, the company ended up setting aside hundreds of millions of euros to cover employment-related liabilities associated with Spanish delivery riders.
Contracts can promise many things.
Actually collecting under a warranty—especially when no escrow is in place—is another matter entirely.
Future risks also transfer completely to the buyer.
The industry may change.
Regulation may shift.
A well-funded competitor may enter the market and engage in aggressive pricing.
A technological breakthrough may render the company's product obsolete.
A business worth €5 million today could be worth nothing four years from now—and might even require additional capital simply to survive.
From the day the acquisition closes, all of those risks belong to the buyer, not the entrepreneur.
In my experience, once I explain this, the outrage usually subsides.
Only a little, though.
The truth is, I don't know whether €5 million was the right price for that entrepreneur's company.
My guess is that it probably was.
After all, he had run a competitive process involving multiple buyers and received more than one offer.
That is, by definition, a market price.
What I do know is that comparing it with the valuation of a startup made very little sense.
Ironically, founders often make the very same mistake within their own companies.
A startup raises a seed round at a €5 million valuation.
A few years later it raises another round at €25 million after reaching €2 million in ARR and posting rapid growth—even while burning €5 million a year.
Five years later the business generates €4 million in revenue and €500,000 in EBITDA.
The founder can't understand why, despite the company now being twice as large and having gone from losing €5 million annually to earning €500,000, buyers are only offering around €10 million.
It's exactly the same misunderstanding.
Only this time, it's the very same company.
Joshua Novick
Managing Partner,Bondo Advisors
cloud technology axon
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