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.
Similarly, the methodology also begins to break somewhat if your growth rate hasn't settled down in a predictable range. E.g., 10x YoY growth will often lead to a very high multiple... but it should work reasonably well for anything under 5x YoY (i.e., 400% growth).
Annualized Revenue
If you're a SaaS business, enter use MRR * 12; if you're a transactional or seasonal business, account for it accordingly.
Growth Rate
Enter your current, annualized (year-on-year) growth rate, adjusting for any "lumpiness". E.g., if you grew 2x YoY but only 10% in the most recent quarter, your growth rate = (1.10^4) - 1 = 46%. But if the slowdown is temporary, or due to seasonality, use the most "predictive" growth rate you can (which might be YoY, for example).
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 (so far), we're in a "tight" market, a big shift from "inflated" in early 2022. This is a big contributor to declining valuations (including in public markets). You can't really influence this, but we made it an input field since toying with it may be interesting, to understand your company's valuation in different market environments.
Multiple
This is a fundamental characteristic of business quality, tied to retention, competition, moat, capital needs, etc. The market average is 6x. As a guide, a multiple of 2 might indicate a company with very high CapEx, or one in decline. A multiple of 4 often implies a transactional business, or one with high customer acquisition costs. A multiple of 6 denotes a typical, successful business. A multiple of 8 is pretty rare, and means the business has a strong moat and high retention. A multiple of 10+ denotes an exceptional business, something that is very sticky or "infrastructure".
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