My cofounder and generally extraordinary financing-whisperer, Bill Hildebolt wrote an email to a colleague who was asking about current multiples of tech/new growth companies. As an update to my blogpost about multiples earlier in the year, the market is definitely more frothy and more yielding in certain spaces. Bill’s analysis breaks down some key changes in the marketplace and their limitations.
Here is Bill’s email response to a ‘current multiples’ question by a colleague:
- yes, most companies are going to be looking to sell (or finance) based off a multiple of revenues, even, typically, runrate or even forward revenues (so, not last years). So if someone wanted to buy us today and we were willing to sell, we’d say it had to be off our 2011 anticipated revenues
- premium deals are trading at up to 10x. here’s a couple of examples of that:
- Salesforce just bought Radian6 at that level
- OpenTable and Logmein – the two big tech IPOs last year – both went out at 10x revenues and have traded up from there
- To get that level of multiple, though, you have to:
- Be at a certain critical mass of revenues….maybe $20mil
- Still be growing as fast as ever
- Have strong market position (and even buzz)
- Be in a sector where the revenues are perceived as recurring / sustainable, probably with one of two characteristics:
- like SAAS or cloudbased software
- network effects like Facebook, Twitter, etc.
- So, VCs will try to do financings in the 3 – 5x revenue multiple range, with the idea that a sale will occur potentially at 5 – 10x revenue. That way, the VC benefits from two things: a) growth of revenues, b) multiple expansion
- Here’s a great example of a range of acquisition outcomes in one story. Three acquisitions on one day by one company of similar companies with 3 different outcomes:
- KickApps had $12mil in revenues and got bought for around $45mil….so 4x
- Kewego had $10 mil in revenue and got bought for around $25mil…so 2.5x
- Kyte had $4mil in revenues and got bought for around $5mil….so 1x.
- If a business is more of a “services” business….for example, like all of the people building Facebook apps…the multiples are going to be lower – say 2 or 3x – with two big caveats:
- If they are CRAZY profitable.
- If the space is on fire (Facebook servicers) and they are perceived as a leader. Like Vitrue, who just raised $17mil. But even others in that space have gotten far less attention because at the end of the days, its just time and materials
- With all of that context, the bottom line is that valuation is driven by two things (as with any company) and if you keep your eyes on these two balls, you definitely won’t sound crazy to the guy on the other side of the table:
- Actual and potential growth rate. If it’s growing like a weed with a recurring, sustainable & defensible revenue stream (like EXPO!), valuation rises
- Company context. If the company is running out of money without a plan, or the CEO has quit, there’s a looming competitive threat, or even there’s only one buyer….valuation is going to get hammered. The difference between a 10x exit and a firesale is often breathtakingly slim. The ability to accurately “sniff” a situation is critical to getting to the ‘best’ answer
If that’s what you get from Bill in an email, imagine how insightful he is in person!