A Better Way to Value Companies
A valuation estimator that accounts for gross margin, growth rate, and market cycle -- a big step forward relative to P/E & P/S ratios.
Using this calculator
This calculator is designed for Series A+ companies, that are well into monetization. If you're very early in that journey, you might be on the cusp of a "vision raise" (see more here), and this calculator will be less useful for your stage.
This calculator can be used for either private or public companies. While it can break at the edges (e.g., companies growing 5x year on year), it otherwise provides a normalized valuation for companies at any stage in their lifecycle, and any industry.
Annualized Revenue
For most businesses, last-twelve-months revenue is probably the easiest number to use.
High-growth SaaS businesses can also use the latest monthly revenue * 12.
Growth Rate
Current, annualized growth rate, adjusting for any "lumpiness" or seasonality.
E.g., if a non-seasonal business grows 10% quarter-on-quarter, growth rate = (1.10^4) - 1 = 46%. But if the business is facing atypical growth or seasonality, use the most reasonable proxy for current growth rate.
Gross Margin
Make sure you have an accurate picture of this and talk to your accountant if needed; it's essential for a proper understanding of your business. For SaaS, this is probably between 70-90%. If you're in e-commerce, it might be much lower. If you're a marketplace, it's probably dependent on your "take rate".
Market Cycle
Mid-2022 through 2023, we're in a "tight" market, a big shift from "inflated" in early 2022. This is a big contributor to declining valuations across private & public markets.
This is pre-set to the current market, but it’s an input field since toying with it may be interesting, to understand valuation in different market environments.
Multiple
This is a fundamental characteristic of business quality, tied to retention, competition, moat, capital efficiency, etc. The market average is 6x, and the slider above provides a description of the characteristics and examples for the range of multiples.
There are a small handful of companies that command a multiple outside the range of the slider — more like 14-16. These are “N of 1” companies, where the market treats them as completely special, unlike any other. Apple, Tesla, and Nvidia enjoyed this status in 2023.
The best proxy for this multiple is net dollar retention. Businesses that generate similar revenue every year without sky-high sales & marketing spend (NDR = 100%) receive a 6x, while companies that have 130% NDR might command an 8-10x multiple.
While this multiple tends to be stable for a given company, fundamental shifts in the prospects of a business can cause a 14x to go to a 10x, or a 4x to rise to a 6x.
A more detailed rundown of the methodology
Check out this more detailed read about the PCG Multiple.
Existing ratios such as P/E don't work for unprofitable companies. P/S also breaks down pretty quickly for very high-growth companies. This is our contribution to calculating a sensible valuation for high-growth, unprofitable companies... namely, startups.
As the saying goes, All models are wrong; some models are useful. This calculator isn't meant to be perfect or flawless, but rather a starting or anchor point, based on sound principles.
We hope this helps in your journey.
Navigating fundraising and investor relations in 2022
Part 1: Startup Valuations & Fundraising
Part 2: The Flavors of Fundraising
Part 3: How Should I Value my Startup?
Part 4: Communicating Valuation to Investors
Part 5: Planning and Allocate Resources