Understanding the gap between market sentiment and intrinsic value

Bull Markets: When Expectations Drive Valuations

During a bull market, rising prices and strong investor confidence make investors more willing to pay higher multiples for future growth.

Consider a company generating ₹10 crore in earnings.

At a 15× P/E multiple, its implied equity value would be ₹150 crore.

If investor expectations push the multiple to 25×, the same earnings imply ₹250 crore.

The company hasn't generated an additional ₹100 crore in earnings. The change comes from what investors are willing to pay for those earnings.

This is why valuation multiples such as P/E, EV/EBITDA and Price-to-Sales can expand sharply during periods of optimism.

Private Markets Feel the Same Pressure

The same dynamics affect private companies.

VC and private equity investors often use public-company multiples, recent transactions and sector benchmarks when assessing private businesses. When those benchmarks rise, private valuations can rise with them.

The 2021 funding boom demonstrated this clearly. PitchBook's *2021 Annual US VC Valuations Report* reported that the top-decile late-stage venture pre-money valuation reached approximately $750 million in 2021.

But a funding-round valuation is not necessarily the same as intrinsic value.

A startup might raise capital at a ₹500 crore valuation because investors believe its future growth justifies the price. If growth later slows, comparable-company multiples contract or capital becomes more expensive, the next financing round may produce a very different valuation.

The business may still be growing. The valuation environment has changed.

Case Study: WeWork

WeWork illustrates how dramatically valuation can change when market conditions and investor expectations shift.

In 2019, the company was associated with a reported $47 billion valuation.

When it prepared for an IPO, investors gained access to greater detail about its financial performance and obligations. According to the University of Hong Kong's case study, WeWork accumulated losses of approximately $3.3 billion between 2016 and 2018, against revenue of around $3.1 billion during the same period.

The proposed IPO was withdrawn, and SoftBank subsequently valued the company at approximately $8 billion.

The difference reflected a change in how investors assessed its growth prospects, profitability, risk and capital requirements.

WeWork eventually filed for Chapter 11 bankruptcy protection in November 2023. Stanford's case study examines the company's valuation through changing venture-capital, public-equity and SPAC markets.

The decline reflected more than changing market sentiment. Greater scrutiny of WeWork's financial performance, long-term lease commitments, business model, governance and path to profitability changed how investors assessed its risk and prospects. The case illustrates why a valuation must be tested against underlying financial and operating fundamentals, rather than relying solely on the price achieved in a prior funding round.

Bear Markets: When Good Businesses Get Marked Down

Bear markets create the opposite problem.

As prices fall and risk appetite declines, investors often reduce the multiples they are willing to pay. That can affect fundamentally sound companies.

Consider a manufacturing business with:
• ₹20 crore EBITDA
• stable revenue
• healthy margins
• manageable debt

Before a downturn, comparable companies trade at 10× EBITDA.

Indicative enterprise value = ₹20 crore × 10 = ₹200 crore

Now suppose market conditions deteriorate and comparable companies trade at 7× EBITDA.

The company's EBITDA remains ₹20 crore.

Indicative enterprise value = ₹20 crore × 7 = ₹140 crore

The business has not necessarily lost ₹60 crore of operating value. The valuation multiple has contracted.

An analysis of 15 S&P 500 bear markets since 1950 found that non-recessionary bear markets had a shallower drawdown of approximately 22%, compared with a median drawdown of 35% for bear markets coinciding with recessions.

What Happens to Private Companies?

Private-market valuations respond to the same changes in capital availability and investor risk appetite.

When investors become cautious:
• fundraising can take longer
• deal activity can slow
• valuation multiples can decline
• investors may demand stronger evidence of profitability
• founders may have less negotiating leverage

The source material notes a correction in late-stage venture valuations following the pandemic-era boom.

For a founder, this creates an important distinction.

If a business was valued at ₹300 crore last year and is being valued at ₹220 crore today, the first question shouldn't be, “Why did my company lose ₹80 crore?”

It should be, “How much of the change comes from the business, and how much comes from the valuation environment?”

Three Ways to Look at Value

1. Income Approach

This approach considers the future economic benefits the business is expected to generate and discounts them for risk and time. It is particularly relevant when future cash flows can be reasonably forecast.

2. Market Approach

This looks at comparable companies and transactions.

But the multiple cannot be applied mechanically. A 12× EBITDA multiple from one transaction doesn't automatically make 12× appropriate for another company.

You need to consider:
• growth
• margins
• company size
• geography
• industry
• risk
• capital structure
• transaction conditions

3. Asset Approach

For asset-heavy businesses, the value of underlying assets can provide an important reference. For businesses where value is concentrated in technology, intellectual property, customer relationships or future earnings, asset value alone may not capture the economics of the business.

A Practical Valuation Test

When markets are moving sharply, test the valuation under different assumptions.

Scenario     EBITDA     Multiple     Enterprise Value
Bear         ₹20 Cr     7×           ₹140 Cr
Base         ₹20 Cr     10×          ₹200 Cr
Bull         ₹20 Cr     14×          ₹280 Cr

The business hasn't changed in this simplified example. The assumptions have.

That is precisely why valuation should be viewed as an analytical range rather than a number detached from its assumptions.

What Business Owners Should Watch

For founders, shareholders and investors, market cycles should be treated as context—not as the entire valuation thesis.

During a bull market, examine whether valuation growth is supported by:
• revenue growth
• sustainable margins
• cash generation
• customer retention
• realistic forecasts

During a bear market, examine whether the decline reflects:
• weaker business performance
• higher financing costs
• lower comparable-company multiples
• reduced investor risk appetite
• or some combination of these factors

The key is to separate changes in the business from changes in the market's pricing of the business.

How Clybourne Insights Approaches Valuation

At Clybourne Insights, we combine DCF analysis, comparable-company benchmarking and scenario testing with expert review to help business owners and investors understand the assumptions behind a valuation—not just the headline number.

The Bottom Line

Bull and bear markets can distort how companies are valued.

In a bull market, expanding multiples can make businesses appear more valuable than their current financial performance supports.

In a bear market, contracting multiples can reduce valuations even when the underlying business remains resilient.

For public companies, the effect is visible in market prices. For private companies, it appears through funding rounds, transaction multiples, acquisition prices and investor negotiations.

The job of valuation is not to ignore these market movements. It is to understand them.

What changed in the business?
What changed in the market?
And how much of the valuation is explained by each?

Those questions often matter more than the headline valuation itself.

Research & Sources

CFA Institute — Bear Market Playbook: Decoding Recession Risk, Valuation Impact, and Style Leadership
https://rpc.cfainstitute.org/blogs/enterprising-investor/2025/bear-market-playbook-decoding-recession-risk-valuation-impact-and-style-leadership

University of Hong Kong — WeWork’s Pre-IPO Value: USD 47bn or USD 8bn?
https://www.acrc.hku.hk/Case/Detail/1054

Stanford Graduate School of Business — WeWork’s Unicorn Bankruptcy
https://www.gsb.stanford.edu/faculty-research/case-studies/wework-unicorn-bankruptcy

Carta — Late-Stage Startups’ Median Valuations Fell Deeper in Q1 2023
https://carta.com/data/late-stage-vc-valuations-q1-2023/

Carta — Investors Pulled Back From Late-Stage VC in 2023
https://carta.com/data/late-stage-2023/

PitchBook — 2021 Annual US VC Valuations Report
https://www.navigatevc.com/wp-content/uploads/2022/02/2021_Annual_US_VC_Valuations_Report.pdf

Finance Research Letters — Valuing Start-up Firms: A Reverse-Engineering Approach for Fair-Value Multiples
https://www.sciencedirect.com/science/article/pii/S1544612321000891