A Better Way to Value Companies
Using this calculator
This calculator can be used for either private or public companies. While it can break at the edges (e.g., companies growing 5x year on year), it otherwise provides a normalized valuation for companies at any stage in their lifecycle, and any industry.
Input | Comments |
Annualized Revenue | For most businesses, last-twelve-months revenue is probably the easiest number to use. High-growth SaaS businesses can also use the latest monthly revenue * 12. |
Growth Rate | Current, annualized growth rate, adjusting for any "lumpiness" or seasonality.
E.g., if a non-seasonal business grows 10% quarter-on-quarter, growth rate = (1.10^4) - 1 = 46%. But if the business is facing atypical growth or seasonality, use the most reasonable proxy for current growth rate. |
Gross Margin | Most people when evaluating companies don’t take this into account, but this is a critical criterion. All revenue is not equal. |
Market Cycle | Mid-2022 through 2023, we're in a "tight" market, a big shift from "inflated" in early 2022. This is a big contributor to declining valuations across private & public markets.
This is pre-set to the current market, but it’s an input field since toying with it may be interesting, to understand valuation in different market environments. |
‍Multiple | This is a function of business quality. The market average is 6x. The major contributors are:
- durability of the business (especially thanks to moat)
- customer retention and sales efficiency
- capital intensiveness
- strength of balance sheet
A useful proxy among SaaS businesses is net dollar retention. Businesses that generate similar revenue over time without high sales & marketing spend (NDR = 100%) receive a 6x; companies with 130% NDR might command an 8-10x multiple.
≤ 2x: Companies that are in trouble (sometimes worse, if on track for bankruptcy).
~ 4x: Companies that have non-recurring revenue, or have to spend a lot on sales / marketing just to keep revenue from declining. They also often have high CapEx.
~ 6x: Companies that have a solid, quality business. Usually top 3 in their category, and are efficient businesses. Stable revenue that is recurring or “looks” recurring.
~ 8x: Companies with a strong moat, an elite brand, and very high customer retention. Their net dollar retention is often >120%.
~ 10x: This is exceedingly rare. Less than 2-3% of companies justify this. They are basically impossible to rip out, and have near-unassailable moats.
≥ 14x: Fewer than 1% of companies command a multiple outside the range of the slider. These are “N of 1” companies, where the market treats them as completely special, unlike any other. Apple, Tesla, and Nvidia enjoyed this status in 2023.
While this multiple tends to be stable for a given company, fundamental shifts in the prospects of a business can cause a 14x to go to a 10x, or a 4x to rise to a 6x. |