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 comparisons 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 to assess, value and understand private companies.
Among these metrics, 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
- AgTech & Alternative Protein
- AdTech & Marketing Tech
- Autotech & Mobility
- B2B SaaS
- Battery Tech & Energy Storage
- BioTech & Genomics
- Blockchain & Crypto
- Cannabis & CBD
- Cloud Computing
- ESG Software & Tech
- Founder-Run Public Companies
- Green Energy & Renewables
- Health & Wellness
- Internet of Things
- Metaverse & VR
- Mining & Specialty Chemicals
- Robotics & AI
- Self-Driving & Smart Vehicles
- Video Games & E-Sports
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.
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.
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 2022
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, further growing by 47% in 2021 all the way to $1.3tn. Firms such as BDO saw no signs of slowing down, however—not unlike the dot-com bubble—a high-interest, high-inflation environment as well as fragile geopolitical balances shifting meant a reality check for investors, who are not able nor willing to provide cheap funds to growing companies.
PwC data shows Tech M&A deal value skyrocket in the second half of 2020 and sustaining incredibly high levels throughout all of 2021, then rapidly declining throughout 2022 to pre-pandemic levels.
However, PwC reassures that high inflation means that many funds are looking to deploy cash as fast as possible although shifting their attention towards business models with proven profitability:
“Amidst waning valuations, a rising interest rate environment and reduced access to major capital markets, companies exhibiting strong fundamentals are becoming increasingly attractive as targets.“
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 over 100 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 stagnated in the following three quarter of 2021.
2022 marked a steep fall in multiples, down 63% year on year. In Q4 2022 the median revenue multiple for SaaS companies was 5.4x.
SEG’s report highlights how the correlation between Revenue Growth and valuation multiples—while still present—has become weaker, while companies showing EBITDA margins over 20% command multiples that are double those of their unprofitable peers.
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 2022 the median EBITDA multiple for SaaS companies was 43.1x.
It’s interesting to see, despite the sharp correction in EBITDA multiples, that profit-related metrics suffered much more limited losses than their Revenue-based counterparts, just highlighting how much the profitability and soundness of business models are at the top of investors’ current concerns.
The information available on this page is of general nature and is not intended to provide specific advice to any individuals or entities.
We work hard to ensure this information is accurate at the time of publishing, although there is no guarantee that such information is accurate at the time you read this.
We recommend taking professional advice before taking on additional financing. If you would like to speak to one of our advisors get in touch.