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Valuations in venture backed companies seem to be a mystery to most. Even in the past 18 months, when it was close to impossible to raise money, we’ve seen valuations in early stage companies that caused a lot of headscratching (Square, Foursquare, Groupon, etc). It begs the question of where these valuations come from. B-school students are trained to believe that valuations are driven by the present value of future cash flows, which is a function of - cash flow, growth, risk, and capital structure.


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