Valuation for Early-Stage Technology Companies

Abstract

The valuation of early-stage technology companies is challenging due to: the lack of clear operating history; disruptive new business models; a rapidly changing landscape for new entrants; and the unpredictable competitive push-back of powerful incumbent players. Revenue based multiples are standard, but these need to be reconciled with a terminal valuation stuck on profitability. There is a simple method to do this, we call it the "Golden Rule", which embodies simple accounting identities that tie present value via sales uplift over five years to a future profit number struck on net margin. This can be used to square valuations against differing profitability metrics by industry.