How do tech valuations
The valuation process is crucial for all stakeholders, whether they are investors, entrepreneurs, or executives. Countless elements must be factored into the calculation of a tech company’s worth and this can be a complex task. There is no single formula that will work for all situations and it is often the case that different methods are used in tandem to come up with an accurate valuation figure. The question is, how do Tech Valuations differ between public and private markets? And what are the main factors that influence this?
A standard method of valuing a company is to use a discounted cash flow valuation. This will be based on a detailed financial projection for the company over a 3 to 5 year period, including revenue growth rates and capital expenditure (CAPEX) projections. The company’s cash flows will then be discounted back to its current value using an appropriate discount rate.
This will give a figure that represents the present value of the company’s future cash flows, taking into account the risk involved in investing in the company. Obviously, there are many factors that can impact a technology company’s valuation, but two of the most important considerations are how it monetises its products and what industry sector it is in.
How do tech valuations differ between public and private markets?
For example, a hardware company might have more tangible assets than a software-based startup but the latter is likely to experience more rapid growth due to lower investment requirements and higher margins. Software companies are often valued at a higher multiple than their hardware counterparts. Deloitte’s 2020 Tech Fast 500 report found that 71% of the fastest growing tech startups were software-based companies.
It is also common for a tech company’s valuation to be based on its past and forecast earnings. This could be a simple multiple of its current or projected earnings, or it may take into account metric such as customer lifetime value (CLV) and customer acquisition cost (CAC). SaaS and subscription-based tech firms will often be valued on this basis, as will other high growth businesses.
Another common valuation method is to look at a company’s enterprise value-to-EBITDA (EV/EBITDA) ratio. This will compare a company’s total enterprise value to its annual earnings before interest, taxes, depreciation and amortization (EBITDA). This is an incredibly common method in the technology sector.
A tech valuation will also take into consideration the value of a business’s intangible assets, such as its intellectual property (IP), patents and brand. This can be particularly useful for a high-growth startup that is in the early stages of its development and has not yet generated significant revenues.
The difficulty with valuing private technology companies is that it can be hard to find comparable companies and relevant market data. For this reason, it is often the case that private technology valuations are more subjective and can be affected by investor sentiment and the size of the company. Book a demo with Valutico to see how we can help you find the right comparables and calculate accurate tech valuations.