Global equity research

Guide to understanding valuation multiples in pricing startups

How do you value your startup?

Sure, the typical answer to an early stage company valuation is “what investors are willing to pay!” but at some point at Series-A and beyond you actually have to deliver results, numbers, something beyond a dream. It is these results upon which you will be scrutinized and compared against.

How will you be compared? Typically dependent on the industry you are in, the phase of your development (And growth) and margins, you will put you in a basket of similar companies. Knowing the numbers you have, investors will try apply apple to apples comparisons, AKA as multiples to value you.

What are multiples?

Glad you asked, though am sure you have heard of them before. Basically there is a numerator (e.g. market cap= valuation) and denominator (e.g. revenue= metric), you divide the two and you get something hopefully greater than one.

Here are the forward multiples for a number of public companies

startup valuation comparison public companies

Now in this case we are using Enterprise value (EV) to revenue. Starting to get a bit more confusing now, right? No stress. Unless you are into financial valuation as a hobby, or worked in investing banking, you never really had a reason to learn this stuff. But you need to get your head around this to understand the valuation game with prospective investors.

Fortunately, many years ago the venerable UBS wrote a great broker report which gets into valuation multiples in a great level of detail. In their words:

  • This document explains how to calculate and use multiples commonly used in equity analysis.
  • We discuss the differences between equity and enterprise multiples, show how target or ‘fair’ multiples can be derived from underlying value drivers and discuss the ways multiples can be used in valuation. For each multiple, we show its derivation, discuss its strengths and weaknesses, and suggest appropriate use

Click the button below to download it and get your multiples geek on!

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