Connect with us


What Drives Early Stage Valuation Multiples of Tech #Startups?



Early Stage Valuation Multiples of Tech

Almost every company I have talked to in the last 2 weeks ( total of about 12 startups) has a question around valuation multiples they should expect for their company. While many are concerned about dilution and loss of control, I think the bigger worry should be the high bar of flawless execution priced into valuations.

Basically the way it works is that the higher the valuation multiple (to your revenue, forward-looking growth or execution to date), the less room you have for errors. The higher the valuation, the more flawless your execution needs to be. Else you will be either replaced as the founding CEO, or face a lower valuation in your next round (called down round, and cause cramming).

I had a chance to talk to about 20 founders who recently raised money in the last 5 weeks. All of them, except 3 have raised money in the US, and of the remaining 18-19, 7 have raised money outside the Silicon Valley.

Most investors (seed or institutional) are always looking for a “low” valuation. Few may be looking for a “fair” valuation at the early stage. Often, it is impossible to determine what the valuation of a company is or how much the multiple on their metrics should be.

The “easier” (relatively speaking) valuation multiples are determined on your revenue, if you have any, profit (still rare) or other metrics that you can sell your investors on (e.g. user growth in the case of social networks for example, when you are not yet making money).

The tougher “nice to have” valuation multiples are on the management team, market size, etc. These negotiations are always harder than those on metrics.

So what metrics matter? According to the 20 folks I spoke with, they all fell into – revenue, expected growth (what the investors believed they would be in 12, 18 or 24 months) and growth to date (execution).

Step 1: The range of the valuation multiple would be determined for most of these by an arbitrary “market size” number and many quoted “angel list” averages as a good starting point.

Step 2: Then the investors would dive into their current revenues (12 of the companies are making some money). The range for multiple of revenue ranged from 5 X (in India) to 30X (at the high end, Silicon Valley, YC company).

Interesting that non of my surveyed companies had more than 30X multiple on their valuation, even though, I have heard via anecdotal evidence again, that there companies getting more.

Step 3: The startup then goes through an exercise of growth projections, and obviously, the higher the growth, the more the valuation multiple. The best way to think about this is via a rule of thumb – for every 10 additional percentage points in growth month-on-month, folks are asking for a 1.1X increase in valuation multiple. So someone growing at 20% M-o-M is asking for 2.2X increase in their multiple, above and beyond their revenue multiple.]

Step 4: Looking at past revenue growth, over the last 6-12 months (if applicable). Many founders are pointing to the past growth purely as a sign of good execution, but not an indicator of future growth numbers. Most founders I talked to believe they will grow faster with the money than without, which the investors discount, since they believe they are providing that fuel.

Step 5: Finally, most cited the use of a well rounded management team and recent competitive “whisper numbers” around startups in the same “space” as benchmark metrics for valuation multiples.

I must caution that most of this is anecdotal and not very scientific, but a good rule of thumb.

What I am telling the entrepreneurs at our accelerators is to make sure they factor in “average” valuation multiples for their projections, but execute so they can get the best.

I’d love your input if you have recently raised money. Let me know in your comments if you’d like to have a discussion (via email or on Slack is preferred).

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *


Creating Artificial Constraints as a Means to Innovation




Artificial Constraints

Many of the entrepreneurs I know have created new innovative startups thanks to real constraints they had. For example, I was hearing AirBnB’s Brian Chesky, on the Corner Office podcast and he mentioned that when he and his cofounder were trying to get some money to get started and the only way to keep afloat was to “rent” their air bed they had in their room. That, then led to Air Bed and Breakfast, which is now AirBnB.

This was a real constraint they had – no money to “eat” so they had to make it happen somehow.

I have heard of many stories of innovation where in the protagonists had real constraints of either financial, technology, supply, demand, economic, social or any number of other characteristics.

The interesting story that I have also recently heard of how Facebook has “pivoted” from being a desktop offering to getting a significant part of their revenue from mobile is how they were given the arbitrary constraint of only accessing Facebook via the mobile phone.

So there are ways that you can create “artificial” constraints to force innovation to happen.

Most larger companies and some smaller ones as well, have to constantly find ways to create artificial constraints – to find a way to innovate and be more be a pioneer.

While some constraints are good – lack of funds at the early stage for example and lack of resources, there are entrepreneurs that are stymied by these constraints and those that will find  a way to seek a path to go forward.

I think this is a great way for you to think about innovating in a new space. If you have constraints, find a way to use it to your advantage.

Continue Reading


The Great Mobile App Migration of March 2020




Mobile App Migration

Over the last few weeks as many in the world have been in lockdown, there has been a temporary “mobile app migration” happening. There are new apps downloaded and they replaced existing apps on the “home screen”.

While some of these apps are likely temporary use, for e.g. I have 6 “conferencing apps” – Zoom, Uber Conference, Webex, Google Hangouts, Blue Jeans and Goto Meeting. That is because of the many people I have conference calls with – each company seems to have chosen a different web conference solution.

Other apps seem like they will have staying power – Houseparty, for e.g. which has games, networking and video conferencing all built into one app to keep in touch with friends and relatives.


The apps that have moved away from my “home” screen, which I expect will come back once the crisis will be behind us include – Uber, Lyft and all the airline apps from Delta, Alaska and United.

Continue Reading


Perseverance with the Ability to Pivot on Data: 21 Traits We Look for in Entrepreneurs




Perseverance with the Ability to Pivot

There are 5 key inflection points I have noticed which makes founders question their startup, to either make a call to continue working on their startup, pivot to a new problem or quit their startup altogether.

It is at these points that you really get to know the startup founder and their hunger and drive to be successful. I don’t think I can characterize those that choose to quit as “losers” or “quitters” because of many extraneous circumstances, but there is a lot of value that most investors see in entrepreneurs who face an uphill part of their journey to come out on the other side more confident and stronger.

These five inflection points are:

  1. When you have to get the first customers to use and pay for the product you have built after you have “shipped” an alpha / beta / first version. Entrepreneurs quit because they have not found the product-market-fit – because the customer don’t care about the product, there is no market need, or the product is really poorly built, or a host of other reasons.
  2. When you have to start to raise the first external round of financing from people you are not familiar with at all. Entrepreneurs quit because while it is hard to get customers and hire people, it is much more harder to get a smaller set of investors to part with their money, if you do not have “traction”, or “the right management team” or a “killer product”.
  3. When you have to push to break even (financially) and sustain the company to path of being self sufficient. Entrepreneurs quit at this stage because they have now the ability to do multiple things at the same time – grow revenues and manage costs, and many of them like to do one but realize it is hard to do that without affecting the other. So, rather than feel stuck they decide to quit.
  4. When you have to scale and grow faster that the competition – which might mean to hire faster, to get more customers, to drive more sales, or to completely rethink their problem statement and devise new ways to grow faster. Entrepreneurs quit at this point because they are consumed by the magnitude of the problem. They overassess the impact the competition will have on their company, give them too much credit or focus way too much on the competitors, thereby driving their company to the ground.
  5. At any point in the journey, when the founders lose the passion, vision or the drive to succeed. Entrepreneurs quit a these points because they have challenges with their co founder, they don’t agree with the direction they have to take, or encounter the “grass is greener on the other side” syndrome.

While I have observed many entrepreneurs at these stages at  discrete points in time, I have also had the opportunity to observe some entrepreneurs in the continuum, and I am going to give you my observations on 3 of the many folks I have known, who, have quit.

Perseverance separates great entrepreneurs from good ones
Perseverance separates great entrepreneurs from good ones

One went back to college to finish his MBA after getting a running business to a point of near breakeven, another found the business much harder than he originally thought he would and got a job at a larger company and the third was just unable to have the drive to go past 11 “no’s”‘ from angel investors.

Over the last 8 years, if I look at my deeper interactions with over 90 entrepreneurs, who I would have spent at least 100+ hours each, I would say that of the 24 people that are not longer in their startup, the one thing that stands out among the ones that persevere is that it is not “passion” or “vision” at all.

It is the inherent belief that they are solving a problem that they believe is their “calling”. They also don’t believe that there is any other problem that’s worth solving as much, even though there may be easier ways to make money.

So most of my questions of entrepreneurs to test whether they will pivot or quit are around why they want to solve this problem (which I am looking to see if they know enough about in the first place) versus any other one.

The answer to that question is the best indicator I have found to be the difference between the pivots, the leavers and the rest.

Continue Reading