How Public Revenue Multiples Impact Startup Valuations

Morning Report: Let’s examine both the gap between public and private valuations and the directional coherence they sport. 

One of Crunchbase News‘ favorite pastimes is tracking revenue multiples. That sounds stultifying, I know, but the exercise helps us understand what startups are worth.

It works like this: If you can figure out what the market is willing to pay for recurring software revenue at 90 percent gross margins, growing at 45 percent year-over-year, you can value all sorts of things. Now, no two startups are exactly alike; however, if you can establish some general benchmarks, the market starts to make more sense.

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And the game works across the public-private divide, but it usually goes downhill. Public revenue multiples have a way of impacting private valuations. So if public SaaS companies take a beating, you can expect that private SaaS companies will take a haircut as well. After all, investors valuing private firms will look to public analogs to figure out what the startup in question might be worth one day. If similar public companies are losing altitude, the startup may get valuation-squeezed when it goes back to the trough or goes through a sale.

All that boils down to the fact that we can use public market movements to understand what startups are worth. And we can make that pile of words visual this morning thanks to Silicon Valley Bank (SVB).

SVB, tech’s Iron Bank, compiled a “State of the Markets” that has a host of data points worth considering. But the following chart caught our eye the most:

Here we are comparing revenue multiples of private enterprise software companies (blue) and public cloud companies (black line). The black line tracks the Bessemer Cloud Index, which regular readers will already be familiar with.

The lessons are simple: Private software revenue multiples are stubbornly higher than public software revenue multiples. That is backward—read USV’s Fred Wilson here—but may imply that private investors are simply willing to overbuy growth in the current cycle as a yield hedge.

And, as you can quickly see, the blue line temporally lags the black line. That tells us that private valuations are tracking public multiples but at a slight pause. It takes some time for the public markets to inform private transactions, so it’s not a huge surprise.

Finally, there is caution in the above. Public markets are constantly setting new all-time highs. If that changes, we’ve learned that it won’t take more than a few minutes to show up in private valuations. Who won’t be ready?

From The Crunchbase Daily:

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