In these past couple of days here the subject was financially diminutive, at first, then very large… the two sides of the coin that speaks to execution and value creation, both predicated on a shared perspective in and from the moment.
Financial value though is all about the future… The operating budget and the long-term forecast notwithstanding, the value of an enterprise is the discounted cash it’s estimated to produce over a future life… and most of that, by far, comes from the unknown.
By that I mean the portion of the valuation exercise that is referred to as the terminal or future value in the discounted cash flow (DCF) methodology – implicitly or explicitly the determinant of everything – even if you think your value estimate comes from some market multiple or metric.
It has been shown by research, and it stands to reason, that the vast majority of the present, as it were, is shaped by that one distant piece, off on the horizon. This is the part that, hypothetically, is what some future buyer would pay, which future buyer will assess that future worth in the same fashion… that is, by estimating what the next time series of cash flows will be, mostly shaped once again by a subsequent future value element… which signifies another future buyer yet… and so on, and so on, and so on… in perpetuity.
So, obviously, when your cash flows of the next few years compete with PERPETUITY, there is no way, no chance, to keep up. And if the value of the enterprise is somehow in its permanence, this is a pretty far-fetched notion when you think about… considering the meaning of the endless, on one hand, and perpetually changing circumstances, on the other.
Perhaps there was a time when these things were more graspable, or so we thought, because the store we went to for our finance books seemed likely to be that same store always, and the books on shelves there seemed like the standard product format, more or less. We can’t say either of these things with confidence anymore.
The future value of the enterprise, now, is its future option value. This grows or shrinks with the envisioned or unenvisioned possibilities. It isn’t a bad thing to invest for maximum optionality.