One of the popular topics right now is asset prices and valuations. Everywhere you look, things are priced at all-time highs — public companies, startups, homes, cars, etc. Whether investing, or consuming, the current market dynamics are highly unusual. In startup land, with the BVP Cloud Index publishing an average revenue multiple of 23x, public Internet companies are priced to perfection. But does that matter?
Let’s say the valuation of all public (and therefore private) cloud companies are cut in half — 11.5x revenue multiples. The BVP Cloud Index average growth rate is 37%. Assuming growth stays the same (which it won’t), and valuation multiples are halved, how long will it take to grow into the previous valuations?
Let’s break down the math:
Current Valuation is $1 billion
At a valuation multiple of 23x revenue, revenue is $43.5 million.
If the new valuations were cut in half, $43.5M * 11.5 = ~$500M.
Assuming a constant growth rate of 37%, let’s look at how long it takes for the $500M valuation to get back to a $1B valuation.
$43.5M * 1.37 = $59.6M revenue
$59.6M revenue * 11.5 multiple = $685M valuation
$59.6M * 1.37 = $81.6M
$81.6M revenue * 11.5 multiple = $940M valuation
Now we know: if valuations get cut in half, it’ll take just over 24 months to grow back into the previous valuation, assuming a constant growth rate. And, assuming continued growth, the startups will dramatically appreciate in value once again post valuation reset.
Growth, growth, growth. As long as there’s strong growth ahead, valuations can be drastically reset and there’s still great value creation in the future.