Startup Growth Metrics & Valuation using Multiples

Question 1

What are the steps for multiples valuation

Answer 1

1) identify firms in the same business as the firm you want to value (comparable firm)
2) calculate the multiples for the comparable firms and come up with an estimate of the maples for the firm you want to value
3) multiply the estimated multiple by the metric of your firm

Question 2

when do you use enterprise vs equity multiples

Answer 2

enterprise: value whole company
equity: value small equity stake

Question 3

what are some examples of enterprise multiples

Answer 3

EV/ Earnings
EV/ Sales
EV/ revenue
etc.

Question 4

what are some examples of equity multiples

Answer 4

Price/Sales
Price/EPS (PE ratio)
Price/FCF per share
etc

Question 5

which multiples to use to value firms coming out seed/angel stage

Answer 5

volume of activity multiples (sales)
customer focused multiples (CAC ratio)

since ebitda is largely nonexistent

Question 6

which multiples to use to value transactions

Answer 6

multiples derived from comparable transaction, for example startup acquisitions in the same industry

Question 7

which multiples to use to value firms with no revenue or limited asset base

Answer 7

price to subscribers, price to users,

Question 8

why should you beware of using multiples with market equity value or stock price as opposed to total firm value

Answer 8

ignore the effect of leverage on the cost of equity, comparable firms could have drastically different leverage

Question 9

why do start up metrics matter

Answer 9

• healthy, sustainable, efficient, and scalable growth
• what gets measured gtes done
• competitive advantage and indicate product-market ft

Question 10

what are some examples of basic startup growth metrics

Answer 10

Annual recurring revenue (ARR), Monthly recurring revenue (MRR), Churn, Cash burn

Question 11

what is customer acquisition cost (CAC)

Answer 11

average amount of sales and marketing dollars spent to get a new customer

Question 12

what is SAAS churn

Answer 12

percentage rate at which SaaS customers cancel their recurring revenue subscriptions

Question 13

what is normal churn

Answer 13

5% ish (longer the contract lower the churn)

Question 14

what is depth of user engagement

Question 15

what is net promoter score

Answer 15

‘on a scale of 1 to 10, how likely are you to recommend our business to a colleague’

Question 16

what is lifetime value of customer

Answer 16

average revenue per account per serious

Question 17

how to calc CAC ratio and what is it used for

Answer 17

LTV/CAC, how much does a customer return in net revenue - dictates how much a business can afford to spend to acquire that customer

Question 18

what are the gross margin benchmarks

Answer 18

75%+ :good
70%- :red flag

70-85% most

Question 19

what is SAAS sales efficiency (magic number)

Answer 19

how efficiently a company is creative value. compares revenue to what was spent on sales and marketing in a given period

Question 20

what are the pros of multiples metrics

Answer 20

easy to do
uses current data
embody market consensus about discount rates and growth rates
provide disciple in the valuation process by providing a clear benchmark

Question 21

what are the cons of multiples metrics

Answer 21

simplicity assumes all companies are alike in growth rates, cost of capita and business composition (hard to find true comps)
hard time incorporating firm specific information
book values can vary across firms depending on the lifecycle of company
beware of accounting differences between firms

Question 22

what is the conceptual difficulty of multiples

Answer 22

valuation using multiples is relative, if everyone used relative valuation than it would break down as prices would become divorced form fundamentals

relative valuation is often cited as contribute to speculative bubbles