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by zephod 3769 days ago
My feeling is that a simple revenue multiplier doesn't work as a seed stage business valuation.

For example, how does this work for pre-revenue SaaS startups valued $1M-$5M during seed? Even if they've started generating revenue, much of their value comes from the long-term network effects and potential to create a market (right?)
2 comments
patio11 3769 days ago
Seed stage businesses are sold based on the dream of growing into VC-backable rocket ships; these businesses are sold on being reliable cash machines. If you're growing at e.g. 20% month-over-month and have $25k MRR, you quite reasonably will get offered valuations in the high single-digit or low double-digit millions for the company. (When you attempt to sell 10~20% of it in a seed round.) The valuation methodology is, essentially, "whatever we can convince 1+ VCs to accept because they're scared that if they don't say yes a competitor will." It's far more sensitive to prevailing sentiment in the VC community and broader tech market than it is sensitive to the exact particulars of the business being partially sold.

If you're growing at 20% year-over-year, you're basically not investable. You're totally salable if the business generates a profit; if one were to throw out $100k per year for that profit (on an SDC basis as discussed in this post), expect the valuation to be $300k to $400k. This is much, much less sensitive to the current headlines on Wall Street.

There's a lot of daylight between $400k and $10 million, right? That's the premium the market places on growth. This is one of the reasons the G word comes up so much in pg's writing about startups. (See http://www.paulgraham.com/growth.html among many other examples.)

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ThomasSmale 3769 days ago
Our data is related to outright sales of [generally] self-funded SaaS businesss.

It's not the same as the VC/angel world where they are investing in unprofitable or pre-revenue SaaS businesses based on potential or estimated future cashflows. The multiples we discuss will not apply in these situations and it's really not our area of expertise.

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