Venture Valuations

Valuation for early stage investments tend to look like horse trading because traditional valuation tools, i.e. P/E ratios make no sense when a company is losing money.  Because we invest into pre-profit (and in many cases pre-revenue), we tend to use a price to sales ratio for valuation. For companies that aren’t generating revenue, we can work backwards and discount forecast revenues.

What basis would you use for determining an appropriate multiple?

Icon Corporate Finance have published their 2006 figures for Technology M&A. Their numbers are a good place to start that discussion based on achieved exit prices. You can see on the left hand axis that price to sales multiples tend to fluctuate between 1.5x and 2.0x for 2006:
Price to sales.jpg


  1. Hi Jason,

    which sales does Icon take? Is that an (discounted) average over multiple years or only for the following year? I am learning in this area, and really would like to find out.

    BTW isn’t price to sales not displayed on the right hand axis or am I now confused??

    Thank and regards,

  2. Koen

    They take “last twelve months”. The x axis has both Price to EBIT and Price to Sales, look at the right hand side of the graph – you’ll see the the scale is from 0 to 4 with “Price to Sales” at the top.

  3. Statistics and Lies. M&As do not follow a normal curve, so averages do not mean anything. Companies either suck and get bought for pennies or really succeed and get bought for a lot. Take the average of the two and it tells you — nothing!

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