Multiples are essential tools in financial analysis, providing a straightforward way to evaluate and compare companies. The Multiples Benchmark module on Equidam offers valuable benchmarks that give startups and investors context for their valuations.
When using this module, it is crucial to understand that these benchmarks serve as reference points to help you gauge whether your implied multiple is on the high or low side, or is within a reasonable range. This context is provided to make informed decisions about valuations, whether you’re evaluating an investment offer, starting a fundraising campaign, setting stock option prices, or conducting internal financial analysis.
Key Benefits:
Contextual Understanding: Helps in interpreting whether a company’s valuation multiple is out of bounds or within a reasonable range.
Informed Decision-Making: Provides a solid basis for evaluating offers and making strategic decisions with confidence.
Benchmarking Performance: Allows you to compare your company’s performance against industry standards and historical data.
This article will explore the different types of multiples covered in the module: Advanced Multiples, Multiples of All Industries, Stage Multiples, and Historical Industry Multiples. Understanding these metrics will enhance your ability to make informed investment decisions and evaluate your company’s financial health accurately.
"While multiples are indeed often an input for valuing mature, slower growing companies, in the private, high growth tech market, entry multiples tend to be a byproduct of the valuation process." ¹
Advanced Multiples
Definition: Advanced Multiples are the max and min multiples of the companies you chose as comparables in the Advanced Multiples tab on Equidam.
Calculation: On Equidam, advanced multiples are calculated using data from the advanced multiple tab. To adjust these multiples:
Navigate to the Advanced Multiples tab
Add and remove individual companies
Include comparables that are similar to the company in risk and return, normally by finding companies similar in size, industry, geography, and growth potential
Usage: These multiples help in assessing a company's value relative to its closest and most specific valuation comparables.
Multiples of All Industries
Definition: This metric reflects the highest and lowest multiples across all industries in the stock market.
Calculation: How Equidam calculates them:
Twice a year, as part of our parameters update, we update and review multiples of all industries
For the module, we select the max and min multiple across all industries from the most recent update.
Usage: This multiple range gives you a benchmark of your company multiple compared to the market as a whole. The right industry is always difficult to identify, so it might be that the company looks over- or under- valued in its own industry but, with the context of other industries, it does not.
Stage Multiples
Definition: Stage multiples are tailored to companies at different development stages, from startups to mature firms.
Calculation: How Equidam calculates them:
The full explanation and sources can be found here: https://support.equidam.com/en/articles/9561981-reference-multiples-for-each-startup-stage
Usage: Stage is often overlooked as a critical variable when benchmarking multiples. By comparing a company’s multiple to multiples at different stages, we can add a new dimension to the analysis. This approach helps determine whether a multiple that appears too high or too low for a specific industry might actually be reasonable when considering the company’s stage of development. This nuanced understanding allows for more accurate and contextually appropriate valuations.
Historical Industry Multiples
Definition: Historical industry multiples track the valuation ratios of the specific industry over the past ten years.
Calculation: How Equidam calculates them:
Collecting historical financial data.
Calculating bi-annual multiples.
Analyzing the data to identify high and low points.
Usage: Historical data helps investors understand industry trends, providing context for current valuations. The industry might be current “hot” or “cold” and be in a moment in history when its multiples are historically high or low, historical context aids in further understanding the valuation of the company.
Conclusion
"When the multiple is implied, investors will then compare it to others seen in the public and private markets to get more comfortable. Think of it like a gut check, a way to determine if the valuation feels 'reasonable'."
"When Entry Multiples Don't Matter", by Alex Immerman and David George of Andreessen Horowitz
Understanding and utilizing different multiples is crucial for effective financial analysis and investment decision-making. Equidam provides robust tools to help you leverage these metrics for deeper insights and better strategies.