Most important metric for growth equity investors
Wondering what finacnial metric of an investment is most important to growth investors. Are deals underwritten on EBITDA so it EBITDA and subsequently EBITDA Growth the most important? FCF? or just Revenue? trying to understand what they would look at as most important and how they would assess if a deal has been particularly successful or not.
For growth equity investors, the most important financial metric often depends on the specific industry and stage of the company, but revenue and revenue growth typically take center stage. Based on the most helpful WSO content:
Revenue Growth: Growth equity investors prioritize top-line growth as it reflects the company's ability to scale and capture market share. They often focus on historical and projected revenue CAGR (Compound Annual Growth Rate) to assess the trajectory of the business.
EBITDA & EBITDA Margin: While EBITDA is crucial for understanding profitability, it may not be the primary focus for growth equity investors, especially in earlier-stage companies. However, a stable or improving EBITDA margin is a positive indicator of operational efficiency as the company scales.
Free Cash Flow (FCF): FCF becomes more relevant when assessing the sustainability of growth and the company's ability to fund operations or expansion without external financing. For growth equity, this is often secondary to revenue growth unless the company is at a more mature stage.
Retention and Recurring Revenue Metrics: For SaaS or subscription-based businesses, metrics like gross/net retention rate, ARR (Annual Recurring Revenue), and % recurring revenue are critical. These metrics provide insight into customer stickiness and predictability of future revenue.
In summary, growth equity investors often underwrite deals based on revenue growth and the scalability of the business model. EBITDA and FCF are important but typically take a backseat unless the company is at a later growth stage. Success is assessed by the company's ability to achieve high growth rates while maintaining or improving operational efficiency.
Sources: Thinking like an Investor: The key financial metrics, https://www.wallstreetoasis.com/forum/private-equity/thinking-like-an-investor-the-key-financial-metrics?customgpt=1, PE recruiting technical questions (software specific), POPULAR ACCOUNTING/FINANCE QUESTIONS, Private Equity: How to Analyze a CIM Effectively?
Venture and late-stage venture it's growth and sales multiples. Some growth pe type of funds may be a bit more honed in on margins accepting slower growth, like some type of mix of e.g. 30 growth + 30 margins - those same folks likely also underwrite an exit on a ebitda multiple.
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