How do you value Technology companies?
I've always been interested in reading about the technology industry but I don't have much expertise on valuing the companies in that industry. Does anyone cover companies in the technology industry? The only thing I can think of is that most technology companies have negative earnings so it might be a better idea so look at multiples like EV/Sales or something. What about solvency ratios, efficiency ratios, profitability ratios? Any information on how to value tech companies would be greatly appreciated.
A lot of it will depend on what sector they're in as well as their stage in development.
For example, a company that relies on subscriptions for revenues won't necessarily be able to show profit due to accounting measures of their subscriptions since they can't recognize it all upfront so one metric you could use there is the number of new subscriptions. From that, figure out what the attrition rate is and you can get a sense of how the company is doing vs competition.
To value a startup internet company, we might look at metrics like user growth, % conversions to paid programs, reach, page views + visit length, etc.
Other times, it might be as simple as looking to how much it would cost to develop the code - ideas be damned. A lowball valuation we used to acquire a software company recently was to look at the source code and then work backwards to figure out the cost to develop the software had we started from scratch.. we then threw in a liquidity discount pitched that to the management.
As mentioned above, it's highly dependent on the sector... internet companies are valued completely differently from semiconductor companies, for example. But generally revenue multiples, EBITDA multiples and Free Cash Flow multiples are used, much like anything else. P/E can be a bit less relevant but it really depends on the specific company.
For early stage startups, revenue synergies with a potential acquirer are very important and can be the principal value driver. If they think they can sell a lot of the product, higher value results.
As mentioned above, for Internet companies, registered users, pageviews, conversions, etc. can all be used for valuation.
For subscription companies, Free Cash Flow is often a more relevant metric than EBITDA because cash that is collected upfront but not recorded as revenue will flow through to FCF but not EBITDA. Bookings can also be used in place of revenue.
For hardware companies, gross margin is very important and gross profit multiples can even be used because it's very easy to lose money when your COGS is really high.
Finally, you said "most technology companies have negative earnings..." This is not really the case anymore as the technology has matured significantly. There are numerous buyout shops that acquire profitable, cash-flow positive tech companies and will continue to do so (Silver Lake, Francisco Partners, etc.).
Many people don't realize the extent to which the tech industry has matured. Sure, some sectors such as Internet will have more startups and unprofitable companies, but in general profitable tech companies are valued much like companies in any other industry: pub comps, M&A comps, DCFs, LBO models.
The main thing that makes tech different is that there ARE early stage "hot" companies that can be acquired for what look like ridiculous multiples (e.g. YouTube which went for like 600x revenue).
How to value a technology company with negative earnings (Originally Posted: 05/28/2014)
I got asked this question for a TMT Investment Banking internship for the fall. I said that you wouldn't use EV/EBITDA (because of the negative earnings) and that given the assumption that the company will have positive earnings in the future, you would use a projected cash flow multiple. What's a better way to answer this question?
Thanks!
You're on the right track, but you forgot to ask "Are tech stocks in another retarded bubble?" If so, make sure you multiple all your cash flow assumptions by 4.
Technology is a really broad term, but in general, you could look at EV to revenue, subscribers, clicks, views, etc. You could also think about an attach rate in the context of an acquisition. Top line growth, billings, customer acquisition costs, and customer lifetime value are good things to think about to put things in perspective.
Basically, the idea here is to go as high up the income statement as you need in order to get a positive earnings measure (sales/gross margin/ebitda/ebit/etc.).
If the company is pre-revenue, you would want to connect the multiple to a figure/metric that can be justified as tied to the profit making potential of a business (so something like a social media company, the number of users).
alternatively, you can use a DCF to justify whatever valuation you want.
How do you value a technology platform that wants to be acquired by a large firm for inhouse use? (Originally Posted: 11/21/2014)
A client wants to be acquired by a large platform such as Pizza Hut, McDonald's etc. I understand it may be ideal for them to be acquired by a larger tech bundle package, but how would you value this based on their wants. If McDonalds is currently paying $500/yr per location for a similar technology, would you value this company based on the amount saved per year per location? If so, how many years revenue saved would you base the valuation on?
How to value a start-up tech company? (Originally Posted: 11/06/2012)
I postes it here because I believe I can get better answers than from Google :)
Multiples-?
Real Options-?
Most girls tell me that multiples are a myth.. maybe they are just trying to make me feel better :(
Jk no they dont
You really can't, from an "underlying value" POV. Both the failure rate, and the valuation of the successful ones are so wild that there is no way to take just one and say "it's aiming to be this big and has this % chance of failure". Read: http://paulgraham.com/growth.html - he points out that most VC funds have had maybe 1 or 2 big successes (e.g. GOOG - Doerr) that basically financed all the rest. You can sort of value a bunch of startups, in the form of a VC fund or an incubator (YCombinator might hit a few home runs). There's no way to really value Google or Facebook at early stage...
The best approach for the less disruptive stuff is to think like a trader rather than a business owner, and think about who is likely to pay for this thing even as it is unprofitable. For example, if you are building an e-commerce company, don't look at your profitability and EBITDA projections and multiples. You are much more likely to sell it to a. idiots during a bubble (1999) b. a scared competitor who is for some reason not smart enough to crunch the numbers and your real chance of success, which is why sales growth is more important at the cost of large negative cash flow initially. See for example the sale of Citydeal/Gaopeng/etc. by the Samwer brothers to Groupon. The company was junk, but they got 100m EUR+ out of it because they scared Groupon with their growth rate, and took advantage of both Mason's lack of experience and belief in the business model of group deals. Such a deal is unlikely to happen again as anybody else in that space will know what happened next.
Valuing a Tech Company (Originally Posted: 09/29/2016)
Looking for opinions on the best way to value a pre-revenue technology company? Sitting down with VCs in the upcoming weeks and he's looking for the industry norm as we don't typically play in tech / software. We don't typically sit with VCs either as we're primarily a sell-side house.
Thoughts?
I rarely look at early-stage stuff myself, but analysis probably starts with:
Tech Companies' Valuations - Do We See the Bigger Picture? (Originally Posted: 04/18/2014)
I just read an interesting tweetstream of venture capitalist Marc Andreessen about the valuations of technology companies: Marc Andreessen on corporate finance
From what I understand, he is basically saying that a target tech-company's standalone valuation might not fully capture the synergies that might be realized after the integration of the the target with an acquirer, making the deal seem irrational from a valuation standpoint.
For example, when Facebook announced the acquisition of WhatsApp, many people thought that WhatsApp's valuation was really high. Mr. Andreessen's rationale might make these people think again, as it explains that the public can't always see the bigger/whole picture, as the outsiders do not fully know the acquirer's plans.
Nevertheless, how can we know that there is a "bigger plan" and sound logic behind these kind of deals? How can we approximate an "attach rate" (see the tweetstream) for large tech deals in which the buyer seems to expand into new and innovative fields, but we can't see how exactly they are going to incorporate the target into the existing business, e.g. Facebook's acquisition of Oculus VR?
What do you guys think?
Andreessen seems like a really smart guy, but i just want to mention that he also has more incentive than anybody make this claim. All this guy does is try to sell his unprofitable companies for as much as possible, touting 'bigger picture' and 'long term thinking'. He could be right, I don't know, but that belief is something he relies on to make his money.
Also studies have shown that acquisitions tend to decrease shareholder value for the acquirer, and increase it for the target (Andreessen)
In the example of FB zuckerberg and co has a vision for technology beyond Facebook. All about building the pipeline. People are willing to pay absurd valuations because they believe in the future. Whether or not this materializes you have to wait and see.
Tech Firm Valuation (Originally Posted: 01/07/2011)
Hey guys, I was wondering what are the multiples I should use when doing a technology firm valuation, besides EBITDA? Or particularly, a software company? I did some research on that and found out Technology Industry is thought as the most "normal" industry. But still, is there anything specific about this industry?
Thanks!!!
Tech firms are high growth, I would go EV/Rev or EV/EBITDA. I guess if you wanted to be pretty you could perhaps tailor your denominator based on your comp groups? IE maybe if you had a website comp group (being vague here), you could EV/page hits or something. Bad example, but hope it helps
I worked at a tech boutique this summer mostly in the Internet and DIgital Media group. For internet companies you look at EV / unique visitors of EV / Page views (really fun to look up for a comp set). I do no believe there are industry specific valuation multiples for software companies. I just remember the usual suspects EV/EBITDA, EV/Rev and EV/FCF.
For tech Firms Valuation, Dilution is a big issue (Originally Posted: 09/07/2012)
WSJ article from three days ago makes a good point about the power of dillution seen at tech firms in particular because of options and restricted stock vest -young tech firms like Zynga or FB use equity to compensate employees or even to make acquisitions).
Even when using CapitalIQ you still get basic shares outstanding rather than a fully diluted shares value. FB for example, when using basic number has a value of 30 times 2013 est. income-When using the full number comes out to 38 x 2013 earnings.
Read the full article here http://online.wsj.com/article/SB100008723963904435719045776297439155433…
If you've been long FB or ZNGA, dilution is the least of your worries.
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