Once a startup has revenue, it is often valued as a multiple of it. Borrowing public or late-stage multiples requires adjusting for growth, size and illiquidity before the number means anything.
11 min read · Level 3
When a founder quotes a forward multiple, I think the useful response is to ask for the multiple on the revenue that is already real. The gap between those two numbers is the part of the price that depends entirely on the plan working, and it deserves to be discussed openly rather than blended into one figure.
A revenue multiple divides valuation by revenue. For a company with 1,200,000 of annual recurring revenue raising at a 25,000,000 post-money:
Implied multiple = 25,000,000 / 1,200,000 = about 20.8x ARR
To judge whether that is reasonable, investors often start from comparable public or late-stage companies and adjust.
1. Illiquidity and size. Private early companies cannot be sold easily and carry more risk. If comparable public software companies trade at 8x revenue and an investor applies a 30% discount:
8x x (1 - 30%) = 5.6x 1,200,000 x 5.6 = 6,720,000
2. Growth. A company growing 150% a year may deserve a higher multiple than public companies growing 20%. Forward revenue helps: if ARR is expected to reach 3,000,000 in a year, 25,000,000 is about 8.3x forward ARR.
3. Quality of revenue. Gross margin, retention and concentration change what revenue is worth. 1,200,000 at 80% gross margin and 120% net revenue retention is worth more than 1,200,000 at 40% margin with heavy churn.
Because a multiple borrowed without adjustment can justify almost any price. The same revenue figure supports very different valuations depending on growth, margin, retention and the market's mood.
It also makes clear what an asking price assumes. A 20.8x trailing multiple is only reasonable if the growth and revenue quality are exceptional.
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The asking price read three ways.
Basis Multiple of 25,000,000 post-money Trailing ARR, 1,200,000 about 20.8x Forward ARR if plan is hit, 3,000,000 about 8.3x Forward ARR if growth is half, 2,100,000 about 11.9x
25,000,000 / 2,100,000 = about 11.9x.
The price looks reasonable only if the plan is achieved. The investor's real question is how confident they are in 150% growth, not which multiple is correct.
Applying public market multiples directly to a small private company, or quoting a forward multiple without saying how likely the forecast is.
Divide the proposed valuation by trailing and forward revenue.
Use companies with similar business models and, where possible, similar growth.
Discount for size and illiquidity, and adjust for growth, margin and retention.
Recalculate the forward multiple if growth comes in lower than planned.
When valuing a startup with meaningful, measurable revenue.
Do not use revenue multiples for companies with trivial or non-recurring revenue, where the multiple becomes arbitrary.
Public software company revenue multiples rose sharply in 2020 and 2021 and then fell substantially in 2022, as reported in widely followed public market indices of cloud software companies. Private rounds priced against peak multiples were frequently followed by down rounds or flat rounds.
Multiples borrowed from public markets move with those markets. A price set at a peak carries that risk forward.
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