Valuing Startups Using Public Company Comparables

Valuing Startups Using Public Company Comparables

The comparable companies analysis is a common valuation approach that values a private startup based on market multiples of similar public companies. Here’s an overview of this method:

This methodology values startups based on ratios like P/E, P/S, EV/EBITDA observed in public companies in the same industry and growth stage. The steps are:

– Identify 4-5 listed firms comparable to the startup in terms of business model, markets, growth, margins etc.

– Calculate the relevant valuation multiples like P/E, P/S for each company based on their market value and financials.

– Take the average or median multiple of the comparable group.

– Apply this average/median multiple to the startup’s financial metric to estimate its valuation.

For example, if comparable public SaaS firms trade at 8x revenue on average, and the startup has $10M revenue, its valuation is $80M.

When The Comparable Companies Method Applies

This method works best when the startup exhibits key public company characteristics:

– Has scalable unit economics with predictable margins

– Operates in a sector with enough comparable listed firms

– Has historical financials to calculate ratios like P/S, P/E, EV/EBITDA

Valuing Startups Using Public Company Comparables

Advantages and Limitations

The comparables method enables quick valuation using market-based evidence. But finding close peers for startups can be challenging. And multiples may undervalue startups with better growth potential than public firms.

Overall, comparable company analysis provides a useful data point to complement DCF models or multiples based on private company M&A deals.

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