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20VC: The Ultimate Guide to Scaling Marketplaces, Why Rule of 40 and EBITDA Optimisation is BS, How Founders & VCs Should Approach Market Sizing and Outcome Scenario Planning and Why Europe is Failing with Vinted CEO, Thomas Plantenga & Alex Taussig
The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
Debunking the Importance of EBITDA Margin Optimization and Emphasizing Absolute Cash Flow
The focus should be on the absolute amount of free cash flow generated by a business rather than the EBITDA margin. A business with a higher free cash flow is more valuable, regardless of the EBITDA margin percentage. High EBITDA margin does not guarantee a good business; it's about the absolute cash flow. Businesses with the highest EBITDA margins often have the lowest growth. The enterprise value of a business is determined more by the EBITDA profile over the long term. It's important to underwrite businesses to certain outcomes based on their EBITDA profile. Return on equity is a better framework than margin in evaluating investments. The absolute value of cash flow matters more than the margin percentage. Successful companies have kept their margin low and focused on the context of everything else. Setting a standard margin for an industry can be dangerous and may harm the industry.
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