A genuinely excellent company at thirty times revenue

The business was as good as it looked. The question was whether the price left anything for a new investor.

This is an anonymised composite, not a report about a named company or person. The situation and numbers are typical rather than reported.

Where they were

A vertical software company serving logistics operators. Annual recurring revenue of 4,000,000, growing 80% year on year, net revenue retention of 118%, gross margin 82%, and a burn multiple under 1.5. By every operating measure it was one of the strongest companies the investor had seen that year. The Series B was 15,000,000 at a 120,000,000 post-money valuation - thirty times current ARR. The investor was offered a 500,000 allocation, which would buy about 0.42% of the company.

The problem

Nothing about the company was in doubt. The entire question was price. At thirty times revenue, the investor was paying for several years of the growth that had not happened yet, and a new investor's return depends on what happens after the price they paid, not before it.

The decision

Take the 500,000 allocation at a 120,000,000 post-money valuation, negotiate for a smaller amount, or decline a company they believed in because the entry price left too little room.

What was on the table

• Invest the full 500,000 at the offered price
  For: The company's quality was exceptional and verified: retention above 100%, strong margins, disciplined burn. Companies this good are rare, and passing on them for price reasons is how investors miss the few positions that carry a portfolio.
  Against: At 30x ARR the price already assumed years of continued 80% growth. Working backwards, a 10x return on this entry required roughly a 2,000,000,000 exit after expected dilution - a threshold very few companies in this category have ever reached.
• Invest a reduced amount, around 150,000
  For: Keeps exposure to an outstanding company while sizing the position for the risk that the entry multiple, rather than the business, determines the outcome.
  Against: A position too small to matter still consumes the same diligence time and portfolio attention, and if the company does become exceptional the investor will have participated in it only nominally.
• Decline and revisit at the next round
  For: Preserves capital for opportunities where the price leaves room, and the investor would still see the company again with a year more evidence.
  Against: Strong companies rarely get cheaper. The next round would likely be priced higher still, and the allocation might not be offered again after a pass.

What they chose

The investor ran a reverse calculation before deciding anything about the company. At 0.42% ownership, expecting roughly 40% further dilution across later rounds, their stake would be about 0.25% at exit. A 10x return on 500,000 would therefore require a 2,000,000,000 exit. They judged that possible but well outside the base rate for the category, and declined - writing down explicitly that they were declining on price, not on quality, and that they expected the company to do well.

What happened

Over the following four years the company performed close to its plan: ARR grew from 4,000,000 to 26,000,000. But revenue multiples across the sector fell from roughly 30x to 9x, so its valuation rose only to about 234,000,000. An investor who had taken the 500,000 allocation would have held roughly 0.27% after dilution, worth about 629,000 - around 1.26x over four years, before considering any preferences ranked ahead of them. The company succeeded. The investment, at that entry price, would not have.

What transfers

• Company quality and investment quality are different judgements. This company was excellent and the entry price still made a good outcome unlikely.
• Work backwards from the price to the exit it requires. A 10x on a 120,000,000 post-money entry needs roughly a 2,000,000,000 exit after dilution, which is a claim you can check against base rates.
• Multiple compression can erase years of genuine growth. ARR rose 6.5 times while the valuation rose less than twice, because the multiple the market would pay fell.
• Record the reason for a pass. Declining on price is a different decision from declining on quality, and only the written version survives to be reviewed.

More case studies