What is the difference between private and public company valuations?

Full Explanation

Public companies' share prices fluctuate minute-by-minute based on trading activity; the market cap is simply share price × shares outstanding. This creates transparency but also volatility — share price can disconnect from fundamentals short-term. Private company valuations are set through negotiation: a Series A round at £5M pre-money establishes a valuation, but this is between the founder and investor, not derived from thousands of daily transactions. Private valuations also tend to be optimistic — they reflect management's best-case assumptions and investor appetite for growth stories. When a private company goes public (IPO), often the IPO price is discounted 15-30% from the last private round valuation, reflecting the broader market's more conservative view. This is why founders and later-stage private investors sometimes suffer from IPO 'pops' that exceed opening price (underpricing by the bank) or 'pops' that crash below opening price (overpricing in private rounds). Understanding this dynamic matters: private valuations are agreements between informed parties but are not final judgments of value. Acquirers in M&A will conduct their own valuation and may reach different conclusions than the private market.

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