How to use Multiples for Startup Valuation
Startup valuations have become an increasingly difficult, as the crisis put pressure on the market. The most critical aspect for the entrepreneurial ecosystem is to back up valuations as solid as possible. A startup’s valuation is the pre-money valuation of equity (including cash on accounts, but without debt) before an investment. It determines how much of the company’s shares will be sold to investors, or how much equity will be given to employees, against dilution. Startup valuations are determined by various factors such as the company’s founders or management team quality, product, technology, scalability, and obviously financial and operational performance, industry trends, as well as competition.
One of the most important factors that determines the value of a startup is the multiple – compare Venture Method, or First Chicago Method. A multiple is a metric that investors use to evaluate a company’s performance and potential for future growth in comparison to peers. Investors usually use multiples to calculate the value of a company based on its revenue or earnings. Typically, the higher the multiple, the more valuable the startup or the higher the price of shares for investors. The larger a company gets the more multiples expand, in order to reflect market and brand power.
There are several sources for startup multiples, including publicly-traded companies in the same industry, investment advisors, and private market data sources.
Publicly-traded companies in the same industry are an excellent source of multiples. They have readily available financial statements, which can provide insight into how much similar companies are worth. Additionally, these companies’ P/E ratios can be used as a benchmark to measure whether a startup is overvalued or undervalued.
Experienced investment advisors – just like Venionaire Capital – are another excellent source of multiples. They have access to private market data, proprietary transactional data, industry trends, and information on recent deals. Investment advisors often use an adapted discounted cash flow (DCF) method with a terminal value called “First Chicago Method” to determine startup valuations. This approach factors in the startup’s expected cash flows and uses a (mostly very high) discount rate to calculate the present value of those cash flows.
Private Market Data Sources
Private market data sources are another great source of multiples. Many data sources provide information on comparable companies, recent deals, and valuation trends. Some popular private market data sources include PitchBook, CB Insights, or Bloomberg. While these sources often require quite expensive subscriptions, they provide a lot of information. This can be helpful when determining a startup’s valuation. Our Analysts recommend to use www.dealmatrix.com to calculate startup valuations, and have the results challenged by professional advisors.
In conclusion, determining a startup’s valuation is critical for entrepreneurs, investors, and employees. Multiples are an essential component of startup valuations and provide an excellent benchmark for comparing the performance of similar companies. There are several sources for multiples, including publicly-traded companies, investment advisors, and private market data sources. Entrepreneurs and investors should consider utilizing these sources to make informed decisions about startup valuations.