An Easy Understanding of Tech Valuation Multiples
Valuation multiples are essential for assessing a company's value, akin to "price per square meter" in real estate. These multiples can vary significantly based on stage, sector, country, deal size, and other factors. This article explores the three main types of valuation multiples: public companies, VC rounds, and exit rounds.
Types of Valuation Multiple
- Public companies
- VC rounds
- Exit rounds
Public Companies Multiples
For public companies, the primary drivers of valuation multiples are growth and profitability. Companies with high growth rates and strong profitability typically command higher multiples. Investors look at metrics such as the Price-to-Earnings (P/E) ratio, Price-to-Sales (P/S) ratio, and EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization).
The below chart illustrates how different public companies' valuation multiples vary by their growth rates and profitability metrics.
VC Rounds Multiple
In Venture Capital (VC) rounds, the valuation multiples differ based on the stage of investment. Early-stage companies often have higher multiples due to their potential for substantial growth, albeit with higher risks. As companies progress to later stages, the multiples tend to decrease as the companies' revenue trajectories become clearer and risks are reduced. Commonly used multiples include the post-money valuation to revenue multiple.
The below chart shows VC round multiples by main industry.
Exit Multiples
Exit multiples are used to value companies at the point of acquisition or IPO. Interestingly, the trend for exit multiples is the reverse of VC rounds: larger deals often result in higher multiples. This is because high-value exits are more competitive and typically involve high-quality companies. Metrics such as the acquisition price to revenue multiple or the IPO valuation to EBITDA multiple are used.
The below chart highlights how exit multiples vary with the size of the deal, with larger exits generally commanding higher multiples.
Applying the Right Multiple
Applying the appropriate multiple at the right time is crucial for accurate valuation. It’s essential to understand the current valuation you are raising and to have realistic expectations for an exit valuation. This awareness affects potential payouts for investors, employees, and founders. Misaligning multiples can lead to unrealistic expectations and challenges in future fundraising or exit strategies.
By comprehending and applying the correct valuation multiples, stakeholders can better navigate investment opportunities and exit strategies, ensuring more informed and strategic decisions.
This article is based on information from Dealroom.co's guide on multiples. For more detailed information, visit it here.