The average tech company sells for around $3 million, according to a recent report. But what does that figure really mean?
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Pre-money valuation
Pre-money valuation is the value of a company prior to an investment or round of financing. In order to calculate a pre-money valuation, you must first determine the amount of the proposed investment, then subtract that from the post-money valuation.
For example, let’s say Company XYZ is seeking $5 million in venture capital financing, and the VC firm has agreed to invest at a $20 million post-money valuation. The pre-money valuation would be calculated as follows:
Pre-money valuation = Post-money valuation – Proposed investment
Pre-money valuation = $20 million – $5 million
Pre-money valuation = $15 million
Valuations can be determined in a number of ways, but the most common method is simply to look at comparable companies that have recently raised money or gone public.
Post-money valuation
The post-money valuation is the total value of a company after it has raised money in a round of funding. This valuation includes all primary shares issued in the round, as well as any convertible securities such as convertible notes and preferred shares. The post-money valuation is typically used to calculate how much equity each investor will own in the company after the investment has been made.
For example, if a company has a pre-money valuation of $10 million and raises $5 million in a round of funding, the post-money valuation would be $15 million. This means that each investor would own 33% of the company after the investment has been made.
The post-money valuation is important to understand because it can help you calculate how much equity you will own in a company after an investment has been made. It can also be helpful in negotiating your investment, as you will know how much the company is worth and how much equity you will receive for your investment.
Enterprise value
In order to understand what a tech company sells for, you first need to understand the concept of enterprise value. Enterprise value is the theoretical takeover price. It is calculated by taking the market capitalization plus debt, minority interest and preferred shares, minus total cash and cash equivalents. In other words, enterprise value is what it would cost to buy the whole company today.
The average tech company sells for an enterprise value of 10.4 times its annual revenue. This multiple has remained relatively stable over the past few years, despite fluctuations in the stock market.
What this means is that, on average, tech companies are selling for a little more than 10 times their annual revenue. This multiple has remained relatively stable over the past few years, despite fluctuations in the stock market.
Revenue multiple
The revenue multiple is the most common method used to value tech companies. This method simply takes the company’s annual revenue and multiplies it by a multiple. The multiple can range from 1-5, with the average being 3. So, if a company has annual revenues of $10 million, it would be valued at $30 million using this method.
This method is most commonly used for small to mid-sized tech companies that do not have a lot of other assets, such as patents or user data, that can be valued separately. For larger tech companies with these other assets, the revenue multiple is often combined with other methods, such as the discounted cash flow method, to come up with a more accurate valuation.
EBITDA multiple
The EBITDA multiple is a popular valuation metric, especially in the tech sector. It’s calculated by dividing a company’s enterprise value by its EBITDA (earnings before interest, taxes, depreciation, and amortization). The multiple is used to value a company based on its ability to generate earnings.
In general, the higher the EBITDA multiple, the more expensive the company is considered to be. For example, a company with an EBITDA multiple of 10 is considered to be worth 10 times its ability to generate earnings.
However, it’s important to remember that the EBITDA multiple is just one metric among many that can be used to value a company. It’s not always accurate, and it should be considered alongside other factors such as a company’s growth potential and profitability.
