By Judah Taub
Ella Fitzgerald famously quipped, “It isn’t where you came from, it’s where you’re going that counts.”
The American crooner’s advice, it turns out, is appropriate not just for jazz singers but also for companies considering their valuations in the current economic climate.
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Here’s how startups should be ascertaining their valuation in today’s market based on these timely words.
Keep the past in the past
It’s natural to base your company’s valuation on assumptions of multiples your investors made in your previous funding round. Back then, perhaps together, you agreed to expect a 2x to 3x multiple by the next round. But what’s that actually based on? How do assumptions made one or two years ago hold weight in today’s market—especially the current downturn we’re experiencing?
Looking back in order to arrive at today’s valuation is a flawed formula. Instead, looking ahead adjusts your focus to where it should be: Where the company is going and how to get there.
Assuming your goal is to eventually go public, sell to a public company, or even an M&A with a large private firm, a great place to start is with the information you do have. You are able to analyze today’s public markets, and more specifically, how publicly traded companies in your vertical are faring at this point in time.
How to value your company by looking forward
Simply put, use a multiple that is in line with your industry. The problem for many startups, especially earlier ones, is these multiples can put them in an unrealistic situation. When a startup raises its pre-seed or seed capital, it typically has no sales, no clients and therefore no multiple at all. Over the course of a successful startup’s lifecycle, it will grow faster and “grow into” its projected valuation.
A deeptech startup might only acquire its first customer post-Series A, while a product-led growth software startup may be building its community before concerning itself with revenue. To compensate for this while calculating valuation, one needs to look far enough ahead, and then work backwards.
From future to present
Let’s imagine a startup is calculating its valuation. It starts by looking five years ahead and sketching what this company may look like using a suitable multiple.
Suppose by then, it has reached $100 million in annual recurring revenue; by looking at similar multiples, it should be valued at 20x or $2 billion (clearly there are many other factors and this is a simplified version).
Now that we’re five years ahead, let’s work back toward today: Let’s assume 2.5 years before that, an investor may invest at $800 million, which brings us to today, when someone may invest at a $300 million valuation.
The valuation “milestones” above may be reflected differently based on the startup’s stages, industries, geographies and more, but the power of this model is twofold:
- Reinforce the model by checking with later-stage investors. Find out whether your assumptions for future funding, along with keeping to certain milestones, align with expectations.
- Especially relevant for today: If there is a change in the market, it is easy to account for. Watch the $2 billion assumption change (based on your public market multiples) and adjust the rest of your model.
You could argue you deserve more, but as with the musical dexterity of our “First Lady of Song,” the range is pretty clear.
Judah Taub is the managing partner at Hetz Ventures, a nearly $300 million international fund investing in early-stage Israeli deep-tech startups. Previously, he served as head of data at Lansdowne Partners and has advised multiple young startups.
Illustration: Dom Guzman
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