Thinking About the Value of a Startup at Exit

One of the more popular questions I’ve received after selling our startup to ExactTarget (see ExactTarget and Pardot Join Forces) is how we arrived at the valuation. Valuation, especially in the context of a strategic acquirer, is much fuzzier than a financial buyer that pays a multiple of profits. Pardot, according to the Inc. 500 awards site, reported 2011 revenue of $7.4 million on a cash basis (source), which is far lower than the acquisition price.

Here are some factors when thinking about the value of a startup at exit:

• What are the growth rates like?
• How much faster will the business grow with expanded resources?
• How are the gross margins now? Are they expanding with scale?
• How cost effectively does the startup acquire customers?
• What’s the renewal rate for customers?
• What are public market multiples for similar companies?
• How strategic or complementary is the startup to the core business?

Answering these types of questions can result in valuations that are 1x revenues to 20x revenues, in rare cases. There’s no correct answer — a startup is only worth what someone will pay for it.

What else? What are some other factors in thinking about the value of a startup at exit?