How is the valuation of a startup determined?

Tomasz Tunguz / November, 2017

Description

Tomasz Tunguz, Partner at Redpoint Ventures explains how investors determine a startup’s valuation.

Video Transcript

How is the valuation of a startup determined?

In the early stages it’s more art than science and the major driving force there is auction pressure. There’s a certain supply of shares that the company is willing to sell and there is a certain demand for shares, that’s how many investors or how much money is seeking to buy those shares. Obviously, the more demand there is the higher the price, the higher the valuation. That’s definitely true in the series A market. We ran an analysis for Saas companies and we found no correlation between the revenue of a company and the Series A evaluation.

It’s clearly more art than science at the early stage, but in the later stage and the closer you are to going public so in the series B, C, D, E and so on. Investors really value the business as a multiple of revenue, so they look at public comparables. Companies that are similar and that are trading at the public market. Most of the time value them on a revenue multiple. So, those revenue multiples, in e-commerce can be one to two times revenues and software companies can be 7 to 12 times revenues and maybe sometimes even bigger.

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