Clients and stakeholders regularly ask BLOOM to perform valuation analyses. Main question: what is the value of a fast-growing tech company? Clients have been either the company itself raising a new financing round or a VC/PE/angel investor who wants to verify their own analysis of a target company to pay the right price.
One of the key challenges is to determine the best methodology for valuation. “There are many different ways to value a tech company – step one is always to start with determining the type of business model”, says Merlin de Graaf, partner at BLOOM. “For example, a SaaS company requires a different valuation model than an online marketplace. Since a SaaS player creates monthly revenues, the valuation is highly dependent on the customer lifetime value and churn. A marketplace is totally different, its valuation depends on metrics such as the Gross Merchandise Value (total value of products sold through the marketplace), take rate (percentage of transaction value that the marketplace charges) and network effects (increased value for each participant if a new user joins).”
Young but fast-growing companies have limited historical financial data. Therefore forecasting future revenues and margins is challenging. Besides, forecasted growth rates are often very high and based on many assumptions. As a result, traditional valuation methods such as EBITDA multiples and Discounted Cash Flow (DCF) model can not be applied to young tech companies. Different valuation methods are required, depending on the type of company that is evaluated. A number of venture capitalists have shared their methodologies. For example, a guide on marketplace valuation can be found in A Guide to Marketplaces by Boris Wertz, former marketplace entrepreneur and currently investor at Version One and Andreessen Horowitz. Point 9 Capital (a Berlin-based VC) has an interesting article on relevant metrics and benchmarks for SaaS companies.
BLOOM always takes multiple models and a wide range of variables into account when valuing a fast-growing tech company. Merlin de Graaf: “We look at startup deals in the same region and industry, public data of IPOs of related companies, company information such as their growth plan, roadmap, and strength of the management team. We also challenge their forecasts and assumptions and we take different scenarios into account.” De Graaf: “In the end, the best valuation looks beyond just the numbers.”