2022 Valuations & Multiples By Sector

On this page you can find an index of our reports about valuation multiples for various start-up industries.

Founders and investors often use multiples to establish the value of a company and compare it with its peers in the same industries.

However, not a lot data about private companies and fundraising is made public, especially valuations and multiples — which makes it hard to make comparison between different businesses. This is especially true for innovative high-growth companies, as they often operate in sectors that are still developing and expanding .

Public markets can provide useful metrics that allow us assess, value and understand private companies.

Among these, multiples can come in extremely handy to Founders and investors who need an approximate benchmark based on financial data such as revenue, profit or EBITDA.

Deriving a private company valuation by comparing it to public counterparts is not always a precise method. Because public businesses are typically more liquid, larger and less risky, start-ups valuations tend to incorporate a discount compared to public ones.

Valuation Multiples by Sector

What are valuation multiples?

Valuation multiples are financial measurement tools that evaluate one financial metric as a ratio of another, in order to make different companies more comparable.

Multiples analysis can prove a useful and quick tool to understand mismatches between a company’s performance and its competitors’. It is also useful to better appraise its strategic position in a sector, and gain insights into the main factors driving value in an industry.

To properly compare a company to their peers, Founders should look at those who compete in the same market, are subject to the same set of macroeconomic forces, and have similar growth and returns on capital.

Some of the most popular and widely used multiples are Enterprise Value (EV) over the trailing-twelve-months (TTM) Revenues and EV over TTM EBITDA.

Enterprise Value (EV) is a measure of a company’s total value. EV is the sum of a company’s market capitalisation, plus its total debt, minus any cash or cash equivalents.

Enterprise Value
—————————————————————————————
Trailing Twelve Month Revenue

EV / TTM Revenue (sometimes referred to as EV / TTM Sales) is the ratio between the enterprise value of a company to its annual revenues (sales).

A lower EV/Revenue multiple indicates that a company is relatively undervalued.

Enterprise Value
—————————————————————————————
Trailing Twelve Month EBITDA

EV / TTM EBITDA is the ratio between enterprise value and the earnings before interest, taxes, depreciation, and amortisation. The lower the multiple, the lower the valuation of the company.

Enterprise Value multiples are preferable because earnings ratios can get distorted by leverage.

Alex Bohtra and Zane Williams, two McKinskey senior experts, argue that corporate performance and multiples are inextricably linked. Companies that consistently deliver superior ROIC and revenue growth outperform their competition’s multiples.

Also, multiples vary significantly within different sectors, reflecting the diverse growth rates and profitability of different parts of the economy.

This means that there are no shortcuts to achieving higher valuation. For a business to hit the industry-average multiple, it must match the industry-average expected performance.

Executives can focus on driving growth, higher margins and greater capital productivity to improve the overall performance, which will lead to higher multiples.

Tech M&A in 2021

There is no overstating the case for how 2020 has expanded the role of technology, with most of our daily life moving online. In a year dominated by a global pandemic, the tech industry made it through largely unscathed. In fact, Tech M&A spending in 2020 reached its highest since the dot.com collapse.

Last year made a record-setting 2020 feel like nothing much, with tech M&A spending more than doubling all the way to $790bn. BDO predicts that the momentum is set to continue: “The fundamentals in Tech M&A remain very strong so we see these positive trends continuing through 2022. The continuing ready access of affordable financing and the growing appetite for technology across the economy and society will drive performance and M&A activity”

Source: PwC

PwC data shows Tech M&A deal value skyrocket in the second half of 2020, and sustaining incredibly high levels throughout all of 2021, and while a significant proportion of the total M&A dollar value is represented by so-called “megadeals”, the long tail of smaller funding rounds, mergers and acquisitions is looking solid.

Tech & SaaS Multiples in 2021

SEG (Software Equity Group) publishes quarterly and annual reports which offer interesting insights into valuations and industry trends.

The SEG SaaS Index is comprised of 99 publicly traded software companies that primarily offer solutions via the cloud and / or through a subscription or transaction-based model.

After a growing trajectory throughout all of 2020 which saw TTM EV/Revenue multiples for SaaS nearly double from 8.9x in Q1 2020 to 16.6x in Q1 2021, the metric saw a correction in the following three quarter of 2021. In Q4 2021 the median revenue multiple for SaaS companies in the SEG index was 13.8x.

In terms of distribution and variance, the latest SEG Report shows just how much the different financial and performance metrics that characterise SaaS sub-sectors can impact valuation metrics like multiples.

Companies in the top 25% of the index showed an average Revenue growth of 50% YoY, which commands a premium in terms of valuation and the resulting median TTM Revenue multiple of 38.3x—nearly triple the Index’s median—is a proof of it.

This segment includes companies that are ahead of the growth curve like Asana, Crowdstrike, Ncino or Veeva Systems.

In turn, the bottom 25%, which includes more mature companies like Box or Alarm.com showing more modest growth rates averaging at 19.5% YoY recorded a median EV/Revenue Multiple of “just” 4x. While this can still be considered good in comparison with other sectors, it is less than a third of the Index’s median.

Before looking at EV/EBITDA multiples for SaaS companies, it must be noted that most companies in the index are EBITDA-negative. Therefore, profit multiples can be extremely volatile and show very high figures which may indicate positive investor sentiment just as well as dwindling bottom-lines.

Following a similar trajectory to their revenue counterparts, EV/EBITDA multiples for SaaS companies in the SEG Index grew from 52.8x in Q1 2020 to 96.2x in Q1 2021, before dipping again back to early-2020 levels. In Q4 2021 the median EBITDA multiple for SaaS companies was 55.5x.

The fact that such high multiples are achieved by—mostly—loss-making companies, proves that the SaaS market continues to be incredibly in-demand and valued by investors.

Investors continue to prioritise growth over profitability in. Over the last three years, buyers placed a premium on SaaS companies exhibiting economies of scale.