A favorable startup valuation is arguably one of the most important factors in determining the likelihood of future high returns. But how can investors know a fair valuation when they see it? Looking at a startup’s revenue can help in gauging the fairness of its valuation. A startup’s revenue-to-valuation multiple compares its recent revenue figures to its valuation. And this multiple provides an at-a-glance assessment of how reasonable a valuation is in terms of revenue. But investors need to dig a little deeper than that. The industry a startup operates in has a direct effect on the level of revenue it can achieve and what its valuation should be. Looking at revenue, valuation, and industry in tandem provides a more comprehensive understanding of what is and isn’t a fair valuation.
This week’s chart is a tool for investors to use as a reference. It shows the averages and medians of revenue-to-valuation multiples for startups with more than $50,000 in revenue. These multiples are broken apart by industry for deeper insight. Using $50,000 as a revenue threshold moderates the number of outliers — it is difficult to judge a valuation against revenue when a company barely has any traction.
Even with the revenue threshold, there are still outliers. Some companies have valuations that are completely disconnected from their revenue. For example, Boxabl’s outrageous 33,333x revenue-to-valuation multiple inflates the real estate industry average to 1,229x. But the industry’s median multiple is just 43.4x. When an industry’s average multiple is so different from its median multiple, it’s usually because some companies have extremely high valuations that skewed the overall average. That’s part of why we also provide the median multiples here. Medians are less skewed by outliers and can provide a more accurate benchmark.
In the public market, revenue-to-valuation multiples for mature companies rarely go higher than 15x. These valuations are set by market demand for stocks and vary with companies’ performance. But in online startup investing, founders set their valuations themselves. Founders often use projected revenue in determining valuation — and they tend to be quite optimistic. Valuations can also take into account research and development time, patents, manufacturing equipment, and other hard assets. Therefore, it is normal for startups to have higher revenue-to-valuation multiples than those of the public market companies.
Assuming that all other factors are equal, investors looking to prioritize high returns should favor startups that have revenue-to-valuation multiples lower than their industry medians. And in order to find those deals, investors can come back to this chart to judge the fairness of startup valuations and identify the industries that generally have more favorable revenue multiples.
Note: All data on online startup investing used for the Chart of the Week comes from the KingsCrowd database and represents a snapshot of the crowdfunding market.
