How to value the exit price for a early stage startup? Multiple of current or forecasted revenues?

Our company could be described as a media publishing business. It's growing fast and the market is huge despite being very targeted. We have a buyout proposal from a huge company. They are suggesting to define this exit price based on the success we are able to achieve in the next few years. There will also be a minimum price and a cap for this. What would be a multiple of revenue that makes sense? Any other advice?


"Based on the success we are able to achieve" suggests, to me, you are looking at a price that will be tagged to an earn out provision. In other words, the price of the deal will be contingent on you achieving specific revenue targets in the future. If I'm reading this wrong, please correct me because it's an important piece of information.

Early stage startup typically suggests a focus on revenue growth with minimal focus on earnings. The most valuable acquisitions will be those that have growth in the top quartile of the industry along with an EBITDA that is also in the top quartile. Companies with these will have the highest multiples.

Revenue multiples are also a function of the industry and the general character of the market. Currently, the IPO markets are doing pretty well and the overall M&A market appears to be pretty solid making multiples equally solid.

In terms of industry, the media publishing industry has moderate to slow growth depending on the segment. I'm assuming there is a social or online component to your startup which would suggest that it would be part of the new growth side of the market. Generally speaking, market growth averages are at about 8% for larger companies suggesting that new entrants should be able to sustain low to mid double digit growth over a longer horizon.

"Growth rates", i.e. percentages, can be meaningless for very small companies. For instance, a company that grows from $25,000 to $250,000 in a year has a massive growth rate..... but the value may be very low due to lack of track record and overall profitability. As such, it can be very hard to estimate multiples.

That said, if I were putting forth a hypothetical, it would be something like the following:
Assuming: The company has over $1M in revenue and is growing at an average of 12 - 15% per year.
Assuming: The company is profitable, but barely, say something in the 10% EBITDA range.
Assuming: The company is a service company with few assets but is not subject to significant brain drain (key people leaving would result in devaluing the company).
If any of the above are wrong, it can change things significantly.

Revenue multiples might be in the 0.7 - 1.15x revenue on forward looking and .9 - 1.25 on a trailing level.
EBITDA Multiples could be in the 8 - 10 times on a forward looking and 10 - 12 times on a trailing level.

Take it with a grain of salt because there are a lot of factors you don't mention and more information is important to make a meaningful diagnosis.

Answered 6 years ago

This is a bit dated but one of the best articles I've read on valuation. I found it helpful when thinking about the issue for a company I was trying to sell and I couldn't possibly add anything to it. So here you go:

Answered 6 years ago

I believe it is not that simple. The pre-money valuation and the amount invested determine the investor’s ownership percentage following the investment. For example, if the pre-money valuation is $4 million and the investment is $1 million, then the percentage ownership is calculated as:
Equity owned by investor = Amount invested ÷ (Agreed pre-money valuation + Amount invested)
Equity percentage owned by investor = $1M/ ($4M + $1M) = 20%
Post-money valuation = Pre-money valuation + Amount invested
= $4M + $1M = $5M
The pre- and post-money valuations cannot be analysed in isolation when evaluating the financial merits of a proposed valuation. You should also consider other factors—such as liquidation preferences and dividends—to determine if it truly is a good deal.
Most traditional corporate finance valuation methodologies do not work well for early-stage companies. Discounted cash flow (DCF) is an appropriate methodology for established companies that have a history of revenues and costs. Assumptions about market growth rates, market share, gross margins and other variables can be made to generate scenarios that will establish a valuation range. These assumptions cannot be accurately approximated for an early-stage company, which makes the results questionable.
Price/earnings (P/E) multiple is not appropriate, since most early-stage businesses are losing money. Price/sales (P/S) may be used if a company has generated some sales for a few years.
Most venture capital funds (VCs) investing in early-stage companies will use two valuation methodologies to establish the price they will pay for an investment:
1. Recent comparable financings: The VC will identify similar companies, in sector and stage, as the investment opportunity. Several databases—including VentureSource, Venture Wire and VentureXpert —might provide information that establishes a valuation range for comparable companies. However, transactions that are more than two years old are not considered market. Although some information may not be public, many entrepreneurs and VCs know through word of mouth what the recent valuations have been for comparable companies.
2. Potential value at exit: VCs and other investors have a good sense of a company’s exit value. The value can be based either on recent merger and acquisition (M&A) transactions in the sector or the valuation of similar public companies. Most early-stage investors look for 10 to 20 times the return on their investment (later-stage investors tend to look for 3 to 5 times the return) within two to five years.
For example, assume an exit valuation of $100 million and the VC owns 20% of the company at the time of the exit. The VC would earn $20 million on their investment at exit. If the VC invested $1 million into the company, they would make 20 times their investment. If the VC owned 20% for a $1 million investment, then the post-money valuation of the company at the time of the initial investment was $5 million. As you can see, investors use the post-money valuation to estimate the price an investment must command when they exit or sell the company.
Investors will use these methodologies to set a valuation range. They will have a maximum valuation based on their view of the future valuation and the perceived competitiveness for the deal but will try to keep the price they pay closer to the lower part of the range.
Besides if you do have any questions give me a call:

Answered 9 months ago

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