The Price You Remember

Belief is part of every market; the problem is when yesterday’s belief becomes today’s operating plan.

Belief has been on my mind lately, specifically the role it plays in how we value things. I keep seeing the same behavior in many places; the two, I find showing up the most in my conversations these days are houses and software companies. Take a house. For most people, it will be one of the largest assets they ever own, and almost nobody thinks about their own house objectively. You remember what you paid. You remember what the house down the street sold for two years ago. You remember when there were fifteen offers on everything in the neighborhood. Zillow showed you a number at some point that you liked. Maybe you refinanced against it. Maybe you started mentally spending some of the equity. That number gets lodged, sunk in your head.

Then the market changes; rates are different in a moment. There are more houses for sale, buyers have more options, the house across the street sells for less than you expected, and your first reaction probably is not that your house is worth less too. It is that they sold it wrong, or they were in a hurry, or their kitchen was dated, or their lot was worse.

I am not naively suggesting a house and a software company are economically the same asset. They obviously are not. What interests me is the behavior of the owner when the market starts challenging a price they have learned to believe. Sometimes that owner is a founder. Sometimes it is a sponsor, a board, or an operating team. The behavior is surprisingly similar.

A founder raises capital at a valuation. A private-equity firm buys a software company at a multiple. A board approves a long-range plan using a set of comps. Debt gets placed against the company with some amount of equity value sitting underneath it. Everyone now has a number in their head, and after enough time that number stops feeling like the price somebody paid in a particular market under a particular set of conditions. It starts to feel like the company is worth that.

Those are not the same thing.

The price you remember can live a lot longer than the market that gave it to you

There is a reason the house illustration works. I went looking to see whether the analogy held up beyond my own observation, knowledge, and experience. Economists have studied a version of this behavior for years through loss aversion and reference dependence; A study by David Genesove and Christopher Mayer of condominium sellers in Boston found owners facing a nominal loss asked more for their properties and were much less likely to sell than owners who were not facing a loss.

You can see all sorts of versions of that in the housing market right now. Sellers have been pulling homes from the market rather than accepting prices they do not like. Price cuts have become more common. Transactions slow because buyers and sellers are operating from different ideas about what the same asset is worth. And the funny thing about the house is that even the idea of appreciation is more complicated than we make it sound. Our family got into a great conversation about this over the weekend because we’ve been looking toward a move sometime in the coming year. A house itself, as an object, is always getting older. The roof is getting older. The furnace is getting older. The kitchen that looked great ten years ago now looks like a kitchen from ten years ago.

Some of the appreciation is the land; some is scarcity; some is inflation, population growth, and the school district. Some of it is interest rates and what buyers can afford, or simply that more people wanting to live in that place than there are places available. Appreciation is real; I just think it is useful to know where it came from, the real attributes of appreciation. That is when the parallel to companies becomes compelling; I think we are doing something eerily similar when we look at organizations.

Software went through an extraordinary market, and some of us are still carrying around the prices from it

Software had a remarkable run in 2020 and 2021; it was a really fun and opportunistic period. Capital was cheap, and seemingly every asset was underwritable. Digital adoption accelerated during an unusual macro societal period. Recurring revenue was incredibly attractive to investors, growth mattered disproportionately, and the market was willing to pay for a lot of future value in the present (More on future vs. present value trading in the next note). At the end of 2020, the median public B2B SaaS company in the SaaS Capital Index traded at 16.6 times run-rate ARR, and then somehow, everything became ARR; unusual periods create unusual behavior, objectively. Private companies generally traded below the public index, but the entire market was being pulled upward. I know the environment firsthand; I was part of three transactions during that season.

And during much of 2021, the median was still around 16 times. SaaS Capital itself has described that period as unusually high relative to the market that existed before the pandemic.

Those were real prices; real investors wrote checks, founders exited, and funds marked their portfolios. Lenders underwrote debt around those capital structures. So I’m not saying those valuations were fake; they weren’t. They were the market, but they were that market, then.

That distinction matters because a multiple carries a tremendous amount of belief inside it. Belief about growth, how durable the revenue is, the cost of capital, what is scarce, and ultimately what another buyer will eventually pay. A multiple looks like a number, but underneath it are both spoken and unspoken, assumptions about the future.

SaaS Capital actually describes its own median valuation multiple as a measure of current investor sentiment toward the industry, and I think sentiment is the interesting word here; sentiment is a feeling, a thought, an opinion, because if the conditions change based on a feeling, the resulting multiple can shift even while the company looks mostly the same.

That is exactly what has happened. Software multiples reset as interest rates changed, growth slowed, well, it actually returned to a normalized trajectory; the market became much less willing to pay today for cash flows that might arrive years from now. Now AI, machine learning, and the broader improvement in machine intelligence are changing a second variable at the same time; what we actually believe is scarce, the moat, inside a software company.

PitchBook recently pointed out that a large amount of software credit coming due, maturing / settling over the next couple of years was originated in 2021, when valuations were materially higher. So you have companies approaching refinancing with a capital structure that was put together in one market and an asset that now has to be evaluated in another. In the upcoming periods, we’d be wise to pay attention to the bets made out of continuation vehicles.

I think there is a dangerous dissonance here. The market can accept new information before the people holding and operating the asset do. I have started naming this as market belief lag. And private markets are unusually good at allowing belief lag to persist.

Private markets make that lag easier to live with because your company or assets aren't repriced daily. You can go years between transactions. The old valuation can remain in the board deck, in the fund mark, gulp, in an employee’s expectations, in the founder’s or sponsor’s head, and in the original lender underwriting or equity investment, even though the next buyer may already be thinking about the company very differently.

I’ve started framing this as the market game and the asset game

I want to be careful with the term “true value” because I don’t think there is one perfectly objective number underneath every company, either. Stay with me for the example. And I know what I am about to describe as two games are not literally and wholly separate. Market price is obviously informed by the economics of the asset. I use the distinction because it helps me understand where the return is actually coming from.

A strategic buyer may be able to pay more because it can eliminate or optimize costs or push the product through a distribution channel the company does not have. A financial buyer, however, has a return hurdle. A lender looks at the company through cash generation and downside protection. The owner or operating team may value independence or control in a way no buyer puts in the model.

The value changes depending on who is looking at the asset and under what structure and assumptions; I do however, find it useful to separate the two, and anyone responsible for an asset should understand which one is actually producing the return.

The market game is familiar. What are companies like mine trading at? What did the last transaction in the category clear at? How much capital is chasing this type of asset? What can I get somebody to pay?

That is a real game. I have played it. Anyone who has bought or sold companies has.

The asset game is a completly different one, the questions evolve and are real in a different category. What does this company actually produce? Why do customers keep paying us? What is becoming more valuable inside the business? What is getting weaker? How much cash does the company generate? If I put another dollar into the business, where can I put it where I have a reasonable belief that I get considerably more than a dollar back? (That is my poor attempt at teaching marginal analysis, but it is foundational to almost everything I do, and how I think, what is the next dollar, or action actually worth? A dollar is a means, not an end.)

The best outcomes tend to index toward both games and both perspectives. You improve the asset and eventually the market pays you for what you built. If the value of the company doubled, I want to know why. How much came from revenue or EBITDA growth? How much came from better margins and more cash? How much came from paying down debt? And how much came simply because the market decided that the same dollar of revenue or EBITDA deserved a higher multiple?

Where I get nervous is when most of the expected appreciation depends on the next person paying a higher multiple, and I think that logic is becoming far too normal, there is nothing passive about holding, operating, or investing in an organization. You can buy a software company at 15 times revenue because you believe the market will eventually pay 18, or you can buy it at 15 because you believe you can double revenue, improve margins, deepen the product, increase retention and create substantially more cash flow.

The entry price happens to be the same, but those are very different bets. If the whole bridge from 15 to 18 is that somebody else will eventually pay more, I am relying on the market, chance, to rescue my basis. I don’t consider that an operating thesis.

AI is forcing us to look again at what was actually valuable

This is where software gets especially interesting right now. We use AI as a catch all, generalized term, but underneath that label a lot of capabilities, and outcomes are becoming dramatically cheaper and easier to build. Machine learning capabilities that once required a specialized team can increasingly be accessed through models and APIs. Things that used to justify an entire standalone product can become a feature, or use case inside a larger platform.

I do not think that means software is suddenly a bad asset class; quite the opposite in some cases, as there are many companies that are going to create enormous amounts of value from this shift. It does mean I would be looking very carefully at what I had previously called the moat.

Maybe the moat was never the feature or capability. Maybe it is the workflow, proprietary data, the history the company has with its customers. Maybe it is the integrations, the brand, the distribution, the regulatory knowledge, network effect, ecosystem, or the switching cost, the simple and underappreciated fact that replacing the system would be an enormous pain.

All of those can be real, yet I have watched companies continue describing their differentiation using language that was true eight years earlier. Meanwhile, competitors have caught up, customers expect more, and something that once took twelve months and a full engineering team can now be built much faster.

The company’s valuation has not necessarily adjusted to that reality, and sometimes neither has the cost structure. Neither has the debt, this is not entirely theoretical; the BIS recently found that BDCs (Business Development Companies, this is a part of the distressed market) have roughly $115 billion of software exposure, around one-fifth of their lending, and yet the revenue uncertainty created by generative AI had not meaningfully shown up in differentiated pricing of those software loans. That interests me because it looks like the same lag: the perception of the asset can change faster than the instrument written against it.

Which is why the duration of the capital matters too as the duration of the capital can easily outlive the advantage it was originally underwritten against. A five-year term is the obvious example, but the same problem exists in equity if the operating thesis assumes differentiation will persist longer than it actually does. If I am borrowing against or investing in the next five years of the company, I need to have some idea of what will still be scarce in year five.

A market correction eventually becomes an operating question

If your house is worth less than you thought, you have choices. You can refuse to sell. You can lower the price. You can renovate the kitchen. You can wait. You can decide the market is wrong. All of those can be rational, but if you spend $100,000 renovating because you are offended that buyers will not pay your old price, that is a pretty bad reason to renovate. You would want to know whether that $100,000 actually changes the utility or marketability of the house enough to justify the spend. (Again marginal analysis)

Forget exact multiples for a moment. If a business was underwritten in a market where assets like it cleared around 12 times EBITDA and the same asset might clear materially lower today, the answer cannot automatically be to sit around waiting for 12 to come back. Maybe it does. Markets overshoot in both directions.

One should probably ask what the new price means for the company you are actually operating. Maybe the cost structure was built for a world where capital was effectively subsidizing growth, and it no longer makes sense. Maybe you need more cash generation. Maybe the product needs investment because the differentiation has long eroded; maybe you are spending too much on sales to compensate for something the product should be doing. Maybe an acquisition adds something that the market now values more than what you currently own.

I increasingly think the correction has to live somewhere. Sometimes it belongs in the price. Sometimes it belongs inside the asset and how it is being operated. Sometimes the problem is the capital structure itself. Quite often it is some combination of all three. And maybe the correct answer is genuinely to do nothing. The business is healthy, customers love the product, the economics are good, and the market is temporarily mispricing you.

Fine, but then I should be able to explain why.

“I still believe this is a $100 million company” is not enough; what has to become true for another rational person with $100 million worth of conviction to agree with you?

That question usually gets us somewhere more useful.

Before the next transaction, figure out how much of the valuation actually came from the business

This is where I would spend time before the next financing, recap, refinance, or sale. If you are raising equity, taking private credit, refinancing debt or even thinking about selling, go back and decompose the appreciation.

How much of the increase in value since the last time the business was priced came from the company actually getting better?

How much came from the market paying a higher multiple for the exact same revenue?

If the multiple went back to its historical range tomorrow, what would the business be worth?

If somebody valued you on cash flow instead of ARR, what changes?

If we held the multiple flat from the day we invested, how much value have we actually created?

If your most visible feature became relatively easy to reproduce, what would still be left that customers were paying for?

If the market never gives us the old multiple back, does the investment still work?

Those questions may not produce the answer you want. That is part of the point.

Debt is especially unforgiving here because the interest payment does not care about your reference point. Neither does the maturity date. You can think the company should still be worth $150 million and owe $50 million against it. If the market will only finance the company at $80 million when the debt comes due, the old valuation will not refinance the balance sheet for you.

Eventually you either create enough operating improvement to close the gap, put more equity into the company, change the structure, find a buyer with a different view of the asset, or accept the new price. Equity gives you more room, but belief can create problems there too.

Founders can refuse to raise because they do not want a down round. Sponsors can hold an asset because they do not want to realize the new mark. Investors can carry a valuation longer than they probably should because recognizing the new value is painful. Boards can spend years trying to protect a number rather than asking what would actually make the company more valuable.

That starts looking a lot like the homeowner who would rather take the house off the market than accept what buyers are saying.

Sometimes waiting is smart; sometimes it is denial. You should know which one you are doing.

Eventually somebody has to put actual money behind the belief

Private markets can carry disagreement for a surprisingly long time; the primary reason, again, is that there is no daily clearing price. You can keep the old mark. You can keep the company private. You can delay the sale. You can extend the fund or move an asset into a continuation vehicle. You can tell yourself the market needs another year; and sometimes that’s right, but eventually somebody has to transact. A buyer writes the check. A lender refinances the debt. A new investor prices the round. An LP sells an interest. The company goes public, and that, my friends, is where belief meets money again.

I think a lot of what we are seeing right now is simply that meeting, that intersection taking longer than people expected. Software valuations adjusted, but the companies still had to operate. Debt remained outstanding. Funds still had to return capital. Companies still had employees and customers. Products continued to age.

The market can change its opinion of an asset in a day. The organization cannot reorganize itself in a day. Neither can the capital structure. That lag, between when the market accepts the new information and when the people responsible for the asset reorganize around it, may be where a lot of value gets lost.

Some companies will discover that very little needs to change. Some will realize their cost structure belongs to another market entirely. Some will find that the product has depreciated more than they admitted. Some will have perfectly good companies with bad capital structures; and some will discover that the market had been assigning a lot of value to something that was never as durable as everyone wanted to believe.

The people closest to the operating truth actually have an advantage here because they can see parts of the asset before the market does. You can see customer behavior before it becomes an NRR result. You know whether the product team is moving faster or slower. You know whether sales has to work harder for every dollar. You know whether the big roadmap item everyone talks about is really meaningful or is mostly there because it has been on the slide for three quarters.

Use that information to understand the asset, not merely to defend the old price; that’s what I have been circling for the past few years. We are living through a period where a lot of old beliefs about price are running into new information about value, in housing, in software, in private credit, and across private markets.

And I am less interested in whether all the old prices eventually come back than I am in what owners do when they don’t. The asset is still there. People are still going to work. Customers are still making decisions. Capital is still being spent, burned. Competitors are still building.

And at some point, either the asset catches back up to the belief, or the belief has to move.

P.S. - BIS and BLS are two of my favorite websites; I have found meaningful insights by spending time in the datasets over the last 15 years of my career.

———

The old price is a reference point. The asset still has to earn the next one.

Idealists Only partners with software and tech-enabled businesses through capital, advisory, and operating partnership. For management teams, boards, founders, or institutions evaluating capital or value creation, begin a confidential conversation here.

This article reflects the author’s views and is provided for informational purposes only. It does not constitute investment, legal, tax, or accounting advice, nor an offer or solicitation to buy or sell any security. Company, housing, transaction, and market information is based on sources available as of September 8, 2026, and may change.