Several months ago I was talking to an entrepreneur that was out raising a Series A round. WIth over $1 million in annual recurring revenue, the prospects of raising money were good. Only, the entrepreneur was referencing revenue multiples from other startups that had published revenues and valuations without subtracting the amount of money raised from the valuation (e.g. Buffer had $4.6M in ARR and raised money at a $60M post-money valuation). When talking about valuation multiples, it’s important to separate the amount raised from the reported valuation to understand the actual revenue multiple.
Here’s an example:
- Startup has $2M in annual recurring revenue
- Startup raises $5M and has a published valuation of $20M
- Startup didn’t raise money at 10x recurring revenue, rather the startup raised money at 7.5x recurring revenue as the pre-money valuation ($15M) and then $5M of capital was added to the business for a post-money valuation of $20M
When reading about revenue and valuations, it’s important to back out the amount of capital raised to get the actual revenue multiple.
What else? What are some more thoughts on reported startup valuations being the post-money amount?