Tuesday, May 06, 2014

Valuation Multiples Don't Matter If Your Startup Is Growing Exponentially

Jason Lemkin has written an excellent post pointing out that a major drop in public market valuations is about to affect SaaS startups:
http://bit.ly/1si4dMG

Lemkin points out that major SaaS players like Workday and Cornerstone have fallen by nearly 50% since February 2014, and predicts that early-stage startup valuations will plummet.

Bad news?  Maybe.  But I prefer to focus on a paragraph tucked in amongst the carnage:

"We’re still just in the second inning of the migration of all business process to SaaS.  It’s just getting good.  Even if valuations fall 50% … as long as you grow 10x in a few years … you’ll still be up 5x by then.  For SaaS start-ups, falling valuations, at least on paper, really only mean it will take a little longer to grow into your next target valuation."

Ultimately, multiples do affect the value of your company.  But there are two factors in the Price/Sales ratio that drive the value of your startup--the multiple is one, but the actual sales is the other, far more important factor.

If you build a profitable company that generates $100 million in revenues, the final multiple isn't that important, especially if you're building for the long term.

So let the fund managers worry about the multiples--you should worry about the business.

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