While evaluating high growth tech startups and companies, we often see low or no profitability as the typical answer is that ‘we are in growth mode’. Curious, how does one think about valuing such companies based on P&L, Balance Sheet and Cash flow statements. What additional documentation would you ask for? Any metrics around CLTV, engineering strength etc, would be helpful…
I think it’s still based on discounted future cashflow, which explains the growth stocks’ performance in the last few months. Inflation and interest rates have been low for more than two decades. Some of these growth companies have been valued at unrealistically high amounts. With central banks around the world wanting to increase rates to curb inflation, we see mean reversion in growth stock prices/valuations.
I would proceed with cautious with a inquiring about a startup with no history of profitability. It is unproven and extremely risky. I guess the rewards would be big if the risk pays off however I would only proceed if I had the relevant experience and new precisely how to make the start up profitable in that sector.
A common way to value such high growth startups is to use a Enterprise Value / Revenue or Enterprise Value / Gross Merchandise Value approach, which can help to give an indication of the value at a certain point in time. However, this method would need to be supplemented with a intrinsic value approach (i.e. DCF), albeit it needs to be forecasted over a longer than usual duration until it reaches steady state / terminal growth.