“The idea of total beta is something I mentioned in passing a number of years ago, but it seems to have taken on a life of its own and is being used in ways I never intended,” Professor Aswath Damodaran (NYU Stern School of Business) acknowledged during his day-long presentation at the 26th annual Valuation Roundtable of San Francisco held last Friday in Berkeley, Calif. “It theoretically applies if you have an investor who is completely undiversified, but you never have that kind of buyer in the real world. At the other end of the spectrum, ‘beta’ applies for totally diversified investors. Investors in private companies are somewhere in between.”
Damodaran also freely allowed that there are “dark” and difficult areas in the field of private company valuation that even he has not yet explored. Liquidity? Marketability? Discounts? Premiums? “Fundamentally, these qualitative factors must at some point show up quantitatively in the cash flows because there are no qualitative dollars,” he reminded attendees, “only quantitative dollars.”
When doing a discounted cash flow analysis, Damodaran also advised analysts to “quit worrying” when they end up with a vast amount of value in the residual, especially in startups and non-dividend paying companies. For these types of businesses, he suggests “figuring out the residual first,” then working backward in the cash flow analysis to tie it into what the company looks like currently.
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