Tagged: growth companies
- This topic has 7 replies, 8 voices, and was last updated 11 months, 2 weeks ago by Kyle Sigmund.
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March 14, 2022 at 4:45 pm #57455Manjunath BhatMember
Hi all,
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…Manju
March 16, 2022 at 7:59 pm #57529Wilhelm LeeMemberI 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.
March 21, 2022 at 9:42 am #57625Laurence HallMemberI 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.
March 26, 2022 at 8:10 am #57807Gordon FooMemberA 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.
September 20, 2023 at 7:25 pm #86492Tim LewandowskiMemberI deal in this realm quite a bit, as we commonly target startups with product development milestones. Critical here is to determine first and foremost the alignment of the target to our global strategy for 5-10 years. If alignment exists, we would then engage in a business plan and employ DCF (which is challenging with no profit history).
October 16, 2023 at 6:20 pm #88246Bruno TurquetoMemberI believe that when there are no clear financial metrics, VCs and Private Equity companies tend to try to focus on the potential of professionals and not necessarily on the business. It is very common for startups to change their focus and products during the first few years, so professionals are more important than the business.
October 18, 2023 at 8:16 pm #88482Shantaram NadkarniMemberI do not have direct experience in this area but the influx of SPAC deals that have taken place in the past 5 years has shown how risky these investments are. The value is now penny stocks for most of those deals. The lesson is you just need to follow the basics; Look for contracts and products in the pipeline.
October 28, 2023 at 4:28 pm #89103Kyle SigmundMemberAgree with Gordon, that in my experience acquisitions in this scenario are based on Enterprise Value / Revenue based on private & public comparable multiples. What I’ve seen work better than others is tying the acquisition price & payout to earn-outs over the next 1-3 years to align the targets management team with hitting revenue and profitability goals. Compared to paying out the management team in cash & stock and praying they get to profitability.
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