Valuation techniques: Round and Exit Comparables (comps)
Round Comparables
Round comparables (aka comps) are useful when determining a pre-money valuation for a company that has revenue. A source like Triple Tree provides some nice public comps based on trailing twelve months (TTM) of revenue, however they may be out of date. Even then, it will give point you in the correct direction for similar companies by industry.
There are many ways to use multiples to value a company’s current valuation (e.g. revenue, EBITDA, etc), including the run-rate that has two popular methods:
- Annualize the latest quarter of revenue. Take the last quarter/3-months and multiple by 4 to give a yearly amount assuming things stay consistent with the latest quarter.
- Annualize the monthly average of the last quarter/3-months. Take the average of the last 3-months and multiple by 12 to give the yearly amount.
Each of these valuation techniques provide additional clarity into the range of values for an early stage startup. However, another critical factor is the potential exit amount for their investment.
Exit Comparables
Early stage investors focus intensely on potential exits for their investments (mergers and acquisitions or with an Initial Public Offering, IPO) as that is the typical method for them to gain liquidity. Let’s look at the three components for an ideal M&A exit comparable (as IPOs have been rare these days):
- Totally public information on the exit event. All round level comparables (revenue, EBITDA, etc) along with the details of the acquisition (amount of the exit and for cash, or cash and stock, etc).
- The exit comparable is in the same industry and has a similar product with a similar business model.
- The stage of the exit comparable is roughly the same as when you expect the company you are valuing to exit.
The ideal M&A exit comparble is rare, but one that matches a few of the criteria listed above is a good start. One complicating factor is that most M&A activity is not public. Large companies may acquire many businesses where it is not required for them to disclose all of the details as they are relatively small in size. As an example, Microsoft has acquired numerous companies as listed here. For the larger acquisitions they have a press release sometimes with the terms of the deal. Smaller ones are never discussed.
It is possible to use some metrics from Round Comparables to estimate an exit amount. For example, using the revenue multiples of a similar company with the financial projections for the company being valued is possible. It is normal for the investor to give a “haircut” to the financial projections, meaning a discount.
