The biggest risk for a late-stage private company is a growth slowdown. This forces a valuation model shift from a high multiple on future growth to a much lower multiple on current cash flow—a painful transition when you can't exit to the public markets.

Traditional valuation models assume growth decays over time. However, when a company at scale, like Databricks, begins to reaccelerate, it defies these models. This rare phenomenon signals an expanding market or competitive advantage, justifying massive valuation premiums that seem disconnected from public comps.

Notion's funding history reveals its valuation significantly outpaced revenue, reaching $10B on just $31M ARR in 2021. However, the company subsequently grew revenue almost 20x to $600M while its valuation only increased 10%, demonstrating how outlier companies can eventually grow into seemingly inflated valuations.

The old PE model is obsolete in software. With high revenue multiples (7-8x) and low leverage (30% debt), firms must genuinely grow the business to generate returns. About two-thirds of value now comes from selling a larger, more profitable company (terminal value), not from stripping cash flow.

For a proven, hyper-growth AI company, traditional business risks (market, operational, tech) are minimal. The sole risk for a late-stage investor is overpaying for several years of future growth that may decelerate faster than anticipated.

The narrative of "0 to $100M in a year" often reflects a startup's dependence on a larger, fast-growing customer (like an AI foundation model company) rather than intrinsic product superiority. This growth is a market anomaly, similar to COVID testing labs, and can vanish as quickly as it appeared when competition normalizes prices and demand shifts.

Private market valuations are benchmarked against public multiples. Currently, public SaaS firms with 30% growth trade at 15-20x revenue, twice the historical average. If this 'bedrock price' reverts to its 7-8x mean, it will trigger a cascade of valuation drops across the private markets.

Financial models struggle to project sustained high growth rates (>30% YoY). Analysts naturally revert to the mean, causing them to undervalue companies that defy this and maintain high growth for years, creating an opportunity for investors who spot this persistence.

Traditional valuation doesn't apply to early-stage startups. A VC investment is functionally an out-of-the-money call option. VCs pay a premium for a small percentage, betting that the company's future value will grow so massively that their option expires 'in the money.' This model explains high valuations for pre-revenue companies with huge potential.