What Startup Valuation Revenue Multiple Should I Use?
Startup valuation is usually done with a revenue multiple (given that the startup has been generating revenue for several years), because startups most likely have negative EBITDA and profit so other valuation methods are meaningless.
It’s more simple when you have an established company already and you want to value the company using a revenue multiple, but when you have a startup, the question is: what revenue multiple should you use for startup valuation?
I gathered sources from other venture capital investors and conducted my own research from a database of startups. Based on this research, the average revenue multiple for startup valuation is 1x – 5x for startups that are growing very slowly (~10% per year), 6x – 10x for startups that are growing in the lower two digits (30-40% per year), and 10x – 20x for tech startups that are growing in the three digits (300-400% per year).
Now, let me explain how I got to these numbers, so you can see the methodology and validate whether these averages are the right revenue multiples to use in your startup valuation. If you want to just get to the methodology, scroll to the bottom section for this, as first, read these factors to consider when using these multiples.
Factors to Consider When Using the Revenue Multiple
Like I said before, unlike an established company, it’s harder to find comparable benchmarks to derive the revenue multiple to use. So, we have to rely on recent venture capital funding data.
One thing to understand about gathering data from actual venture deals is that how each startup’s valuation revenue multiple was calculated when they made the deal depends on several factors.
These factors include:
- How far they’ve come along, i.e. how much track record of revenue growth can they show? What round of funding is this deal for?
- How fast have they been growing revenue?
- What is their gross margin? Do they have a sustainable business going forward? When do they expect to be cash flow positive?
- What is the average revenue multiple of other more established companies in the same industry?
- What were similar startups in this industry that exited valued at?
So, even if you know what the average startup revenue multiple is, consider whether your startup that you’re valuing should be on the lower end of the range or high end of the range.
Can I Use This Multiple on My Startup? I.e. When is a Startup Not Considered Startup Anymore?
You might also be wondering from what I mentioned above – if a startup has already been making several years of revenue, how is it still called a startup?
That is a good question and there is often a misunderstanding about what the term startup means. A startup in the seed stage or even pre-seed stage would not have revenue, because they are creating the business from an idea.
But a startup continues to be categorized as a startup for the next several years as it gains traction, establishes clients, and is on its way to becoming a sustainable business without the hypergrowth or uncertainty.
In fact, the rule of thumb is – a startup is considered not a startup anymore when it has reached the 50-100-50 rule, which is when a company has $50 million in forecasted 12 month revenue (i.e. revenue run rate), has more than 100 employees, and is valued at more than $500 million.
Startup Valuation Revenue Multiples Methodology
I used a combination of researching what startup revenue multiples that actual venture deal makers used and I also analyzed a startup database. Let’s look at both below.
What Venture Deal Makers Used
- Revenue multiple of 6x – 10x if the startup is growing at 40% per year and 1x – 2x is the startup is growing at a modest 10% per year (Logicboostlabs)
- Revenue multiples of 10x to 20x times and more for the fast-growing, cloud-based businesses, in contrast to multiples of 1x to 5x for the rest (Crunchbase)
- Annual recurring revenue multiples of 15x – 25x (2018 to 2021) for private cloud startups that are growing 100% – 300% per year and about 5x – 10x for public cloud startups that are growing about 30% per year (Bessemer Venture Partners State of the Cloud 2018 and 2021)
My Own Analysis
I looked up the startup database, CB Insights (for those who aren’t familiar, CB Insights is a market intelligent platform that specializes in tech that analyzes millions of data points on venture capital and startups, so this was a suitable database to use), for available data on startup valuation revenue multiples.
Since startup and venture data is not publicized, there were thousands of venture deals but not as many data points on revenue multiples of these deals. But I was able to analyze 47.
In my analysis, I looked at tech startups that have raised funding in series C, series D, and/or series E+ rounds in the last 3 years, and those that have either IPO’ed or were acquired.
From this analysis of 47 tech startups, the average revenue multiple for a startup valuation was 9.3x and the median was 7.7x. And after removing the effects of outliers and extreme multiples, the range is 1.8x to 24.1x.
My separate data analysis actually corroborates what venture deal makers quoted, in that the range will fall somewhere between 1x and 25x.
The range of the revenue multiple that you can use to value a startup based on triangulating different venture capital sources and my own research & analysis is between 1x to 25x. That is a ridiculously large range, so you have to consider additional factors when choosing a multiple for your startup valuation.
For instance, a cloud tech startup that has experienced high growth (200%+ per year) will use the high range of the multiple, whereas a startup in a mature industry like manufacturing that has experienced a modest growth of 20% per year might use a revenue multiple that’s more in the lower range.
Below is a summary of startup valuation revenue multiples from the aforementioned research findings of actual revenue multiples used which I reasonably categorized by the startup’s revenue growth.
|Revenue Growth:||Slow Revenue Growth
|Stable Revenue Growth
(10% – 30% YoY)
|High Revenue Growth
|Super High Revenue Growth
|Hyper Revenue Growth
|Startup Valuation Revenue Multiple:||1x – 2x||2x – 5x||5x – 10x||10x – 15x||15x – 25x|
It’s important reiterate that these are multiples used in past startup deals, but which multiple you should you use for your startup depends on other factors, such as whether the industry is a high growth industry or a mature industry. So, don’t rely just on the revenue multiple to value the startup.
Your article I find to be very useful in understanding startup valuations. Looking at your table at the end of the article I was able to fashion a simple rule of thumb that seems to align nicely with the data. The gross revenue multiple should roughly equate to the square root of the revenue growth rate. Using this rule of thumb, a startup growing at 25% should be priced at 5x while one growing at 100% should be priced at 10x and so on. Let me know what you think.
Great point, Robert! It seems like a really good sense check – I’d be interested to know whether this holds for hundreds of data points. I’ll have to add this analysis to my list to find out. Thanks for sharing your thought!
How are those multiples changing with inflation and interest rates rising? In Brazil at least, our base interest rate went from 2% to 13,75% in about 18 months, due to huge inflation caused by Covid. This has lowered valuations all around, and companies valued at 10 or 20x EV/EBITDA now are negotiating at 2 to 4x. I checked your numbers and they seem a bit odd to me, maybe it’s a different market and those multiples cannot be applied here.
Thanks for your comment, Guilherme. This analysis was done in March 2021 so during COVID and right in the middle of when stocks were rallying. But the data I looked at is not just for 2021 but for the last 3 years. And the other sources I cited were from the last few years as well. I think we will start to see the effect of inflation soon, so it will be a good time to update the analysis after the 2022 calendar year is clocked in and annual reports start to be published in April of 2023. I will also say though that most of my analysis (if not all) is ringfenced to US and Canada (and occasionally includes UK and Western Europe). So, comparing this analysis to Brazil may not be apples-to-apples.
That was very insightful and definitely an interesting way to value start ups. I was wondering if you could share your list of 47 deals for me to filter potential peers to benchmark against based on what my start up is doing. That would be very helpful. Thank you!
Thank you, Jai!