By Judah Toub
Ella Fitzgerald famously said, “It doesn’t matter where you come from, it counts where you go.”
American Crooner’s advice is relevant not only to jazz singers but also to companies considering their valuations in the current economic climate.
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Based on these timely words, here’s how startups should ensure their valuation in today’s market.
Put the past behind
Of course, your company’s valuation is based on the assumptions made by your investors in the past round of funding. Then, perhaps together, you have agreed to expect 2x to 3x multiples in the next round. But what is it really based on? How do the assumptions made one or two years ago hold the weight in today’s market — especially the current recession we are experiencing?
Looking back to reach today’s assessment is a flawed formula. Instead, looking ahead will focus your attention on where it is: how the company is going and how to get there.
If your goal is to eventually go public, sell to a public company, or sell M&A with a large private company, this is a good place to start with the information you have. You are able to analyze today’s public markets and, more specifically, how publicly traded companies in your vertical are moving at the moment.
How to value your company by looking forward
Simply put, use multiple to suit your industry. The problem with many startups, especially the former, is that these multiples can put them in an unrealistic situation. When a startup collects its pre-seed or seed portfolio, it usually has no sales, no clients, and therefore no multiple. Over the course of a successful start-up lifecycle, it grows rapidly and “grows” into its planned evaluation.
DeepTech Startup may only acquire Series A after its first customer, but the product-led development software startup may be building its community before it can be concerned with revenue. To compensate for this when calculating valuation, one has to look a lot ahead and then work backwards.
From the future to the present
Let’s assume that Startup is calculating its valuation. It begins by looking at five years and depicting what this company might look like using the appropriate multiple.
Suppose by that time it had reached $ 100 million in annual recurring revenue; By looking at the same multipliers, it must be done at 20x or $ 2 billion (obviously there are many other factors and this is a simplified version).
Now, five years ahead, let’s work back to the present: 2.5 years before that, investors could invest $ 800 million, which brings us to today, someone can invest $ 300 million.
The above “milestones” may reflect differently based on startups, industries, geographies, and more, but the power of this model is twofold:
- Reinforce the model by checking in with later stage investors. Find out if your predictions for a future fund, along with keeping some milestones, match expectations.
- Especially relevant today: If there is a change in the market, it is easy to calculate. Watch the $ 2 billion assumption change (based on your public market multipliers) and adjust the rest of your model.
You could argue that you deserve more, but as a musical skill of our “First Lady of Song,” the range is pretty clear.
Judah Toub is a managing partner at Hetz Ventures, a $ 300 million international fund that invests in early-stage Israeli deep-tech startups. Previously, he served as head of data at Lansdowne Partners and has advised many young startups.
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