A Better Way to Value Companies
Using this calculator
This calculator can be used for almost any company. It provides a normalized valuation for private or public companies at any stage, in any industry, with any growth rate, any profitability profile.
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 early 2024, we've been mostly 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 a useful input field since toying with it may help 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 10% 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, Crowdstrike, and Nvidia currently enjoy this status in 2024.
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 8x. |