financial ratio for start-ups
I'm building a Saas B2B startup and I'm wondering what kind of multiples are used to estimate future exit valuations. Price/earning ratio, price/sales ratio? For instance, if I plan to build a business that sells X monthly subscriptions @ Y per month, I want to tell an investor that using to this particular ratio, I'm looking to build a business worth Z in 5-7 years.
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I can't answer your question, I have no idea. But why do you want to exit? Does your idea really need funding? – Joel Friedlaender 12 years ago
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I don't really want to exit; I want to explain the size of business I plan to build and for that I know I'll need VC funding. – Frenchie 12 years ago
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VC funding and an exit do go hand in hand. You won't get funding without an exit strategy. It's why I think people should think really hard about whether they really need funding or not. For some businesses it makes a lot of sense of course, but so many look for funding when they don't need it. – Joel Friedlaender 12 years ago
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No sorry, I meant I'm not looking to flip; just keep growing and eventually go IPO or acquisition when the opportunity occurs. – Frenchie 12 years ago
1 Answer
According to Dharmesh, the multiplier for SaaS companies is around 5, where the valuation equation is Valuation = Revenue x Multiplier.
How do you get your multiplier to that? Growth is hugely important. The faster your revenues are growing, the higher the multiple goes. Profitability is negatively correlated with the multiplier for companies about to go public. They are investing in growth, they don’t want dividends.
Factors affecting the revenue multiplier:
- Growth
- Predictability
- Sustainable competitive advantage
- Scale
- Get more customers
- Increase price
- Increase retention
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Ok, thanks for the answer Zuly! – Frenchie 12 years ago
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@frenchie No problem. Hope it was helpful! – Zuly Gonzalez 12 years ago
