Valuations through the 4 Stages of a B2B Startup

Valuations are more art than entrepreneurs are led to believe. Often, the most common refrain is that business valuations are a multiple of EBITDA (a.k.a. profits with some stuff added back). In reality, the stage of the business, along with other measures like revenue, profitability, growth rate, and more help drive valuation. Like anything rare, a business is only worth what someone else will pay for it.

Here are a few thoughts on valuations through the four stages of a B2B startup:

• Stage 1: Search for Product / Market Fit – Valuation is largely driven by the region of the country, background of the entrepreneur, and investor belief in the opportunity (e.g. in the Southeast valuation might be in $1mm – $1.5mm range while in Silicon Valley it could be $3mm – $4mm for the same thing)
• Stage 2: Build a Repeatable Customer Acquisition Process – Valuation is largely driven by the size of round and desired ownership stake of the venture capitalist (e.g. based on the size of the VC fund, and the number of investments a VC makes of the life of the fund, it’s simple math to figure out the necessary size of each investment, which when combined with a 20 – 30% ownership stake, results in the valuation of the company)
• Stage 3: Maximize Growth – Valuation is driven by factors like recurring revenue, growth rate, gross margin, market size, etc and is often negotiated as a multiple of revenue (e.g. 3 times forward-looking twelve months revenue)
• Stage 4: Maximize Profitability – Valuation is driven by earnings before interest, taxes, depreciation, and amortization (EBITDA) where it’s often a multiple of that (e.g. 4 – 6x EBITDA for a small business and 7 – 10x EBITDA for a larger business)

In the first few years valuation is driven by what investors are willing to value the idea and business, followed by valuation driven by top line revenue and growth, and concluded by profitability.

What else? What are some other thoughts on valuation through the four stages of a B2B startup?