Startups are asking for lower multiples, slightly

At DAN Fund we keep track of the number of Series A startups we talk to each quarter as well as data about the round they’re trying to raise such as median MRR, requested valuation, raise, and revenue multiple.  Below is the data we have collected from our conversations with these startups over the past 4 quarters. 

 

    Pre-Money   Revenue Number of 
Period MRR or Val. Cap Raise Multiple Companies
Q3 2015 $75,000 $10,000,000 $1,500,000 9.2x 39
Q4 2015 $59,000 $9,500,000 $2,000,000 13.2x 159
Q1 2016 $67,000 $9,600,000 $2,000,000 10.2x 81
Q2 2016 $69,833 $10,000,000 $1,500,000 9.6x 209

 

A few observations:

 

-The monthly recurring revenue for the typical Series A company has on median ranged from $59k to $75k.

 

-The median valuation companies ask for has consistently been about $10mm, but the revenue multiples startups are asking for based on ARR has trended downward, from a high of 13.2x in Q4 2015 to a low of 9.6x in the most recent quarter.  Note however that the drop in revenue multiple from Q1 to Q2 was far less dramatic, as the multiple went from 10.2x to 9.6x.  This leads us to believe that in Q3, while we may see another drop in the multiple startups are asking for, we expect it to hover around the 9x mark

 

-The number of companies whose data we recorded has varied widely from a low of 39 in Q3 2015 to a high of 209 in Q2 2016.  We do talk to more companies than that each quarter, but many are too far outside our focus to record, may be too early, or could be eliminated for some other reason (for instance perhaps they’re outside the US/Canada).    

 

While it’s interesting data to monitor, it is imperfect as sometimes we forget to record companies that we should.  It’s also of limited value: the valuation requested is rarely the valuation that a company will actually receive.  Nonetheless, we do believe this data is valuable to look at as it gives us a sense of where entrepreneurs think the market for startups is trending: when they ask for high valuations, founders believe the market is hot whereas when valuations come down, it indicates confidence in the funding environment has declined.  In the current environment, we do believe our data is reflecting what we read in other blogs and hear from the startup community as a whole: it has become more difficult to raise money so valuations are coming down

 

That said, while the data shows a downward trend, in our view we do not believe there will be further major declines.  In addition, 9x to 10x ARR is a strong ask given public tech companies trade well inside those multiples (5x for SaaS, 2x for hardware/IoT, 7x for social, 3x for marketplaces, etc).  The table below shows multiples for various kinds of publicly traded tech companies as of June 22nd

 

    TTM TTM  TTM  Capital Enterprise Market       REV PER Q1 2016 Q1 2016
Name Ticker Revenue EBITDA FCF Surplus Value Cap Debt Cash EV Calc $ of D+E EBITDA/REV Rev Multiple
Social                          
Facebook FB $19,770 $9,440 $9,880 $34,886 $306,540 $325,170 $0 $20,620 $304,550 $0.57 48% 15.40x
Linkedin LNKD $3,210 $266 $894 $4,589 $23,460 $25,410 $1,140 $3,160 $23,390 $0.56 8% 7.29x
Twitter TWTR $2,380 -$67 $454 $6,507 $9,390 $11,240 $2 $3,580 $7,662 $0.37 -3% 3.22x
                           
Median   $3,210 $266 $894 $6,507 $23,460 $25,410 $2 $3,580 $23,390 $0.56 8% 7.29x
                           
Marketplaces                          
Just-Eat JSTLF $351 $83 $105 -- $4,187 $4,460 $0 $273 $4,187 --- 24% 11.94x
Zillow Z $703 -$10 $40 $2,985 $5,910 $6,120 $230 $514 $5,836 $0.22 -1% 8.30x
Priceline PCLN $9,530 $3,650 $3,240 $5,274 $69,710 $67,510 $6,420 $3,380 $70,550 $0.81 38% 7.40x
TripAdvisor TRIP $1,480 $233 $403 $758 $8,820 $9,430 $111 $692 $8,849 $1.70 16% 5.98x
GrubHub GRUB $386 $89 $33 $768 $2,200 $2,530 $0 $324 $2,206 $0.50 23% 5.72x
Match.com MTCH $1,070 $263 $244 $405 $4,560 $3,500 $1,210 $148 $4,562 $0.66 25% 4.26x
Sabre SABR $3,110 $706 $552 $2,038 $10,570 $7,370 $3,310 $112 $10,568 $0.58 23% 3.40x
eBay EBAY $8,670 $2,980 $3,520 $14,627 $29,400 $27,960 $9,004 $8,000 $28,964 $0.37 34% 3.34x
Shutterstock SSTK $444 $60 $87 $222 $1,300 $1,610 $0 $276 $1,335 $2.00 13% 3.00x
Etsy ETSY $297 $22 $22 $411 $825 $1,080 $13 $270 $823 $0.70 7% 2.77x
Lending Club LC $501 $25 $78 $1,151 $1,310 $1,840 $15 $584 $1,271 $0.43 5% 2.54x
Expedia EXPE $7,200 $800 $1,420 $8,788 $17,150 $16,070 $3,240 $2,090 $17,220 $0.60 11% 2.39x
Care.com CRCM $146 -$3 $5 $283 $228 $279 $0 $52 $227 $0.52 -2% 1.55x
IAC IAC $3,280 $383 $377 $11,841 $4,740 $4,460 $1,730 $1,430 $4,760 $0.24 12% 1.45x
Angie's List ANGI $344 $16 $15 $278 $443 $439 $58 $59 $437 $1.03 5% 1.27x
                           
Median   $703 $89 $105 $959 $4,560 $4,460 $111 $324 $4,562 $0.59 13% 3.34x
                           
Information                          
Yelp YELP $590 -$9 $56 $793 $1,810 $2,170 $0 $375 $1,795 $0.74 -1% 3.04x
TrueCar TRUE $263 -$38 -$9 $515 $543 $619 $27 $106 $540 $0.49 -14% 2.05x
                           
Median   $426 -$23 $23 $654 $1,177 $1,394 $14 $241 $1,167 $0.61 -8% 2.55x
                           
Content Delivery                          
Yahoo! YHOO $4,830 $2,890 $943 $8,888 $30,770 $35,490 $1,250 $5,980 $30,760 $0.48 60% 6.37x
Netflix NFLX $7,160 $320 -$851 $0 $39,270 $38,550 $2,370 $2,070 $38,850 3.02 4% 5.43x
Google GOOGL $78,000 $25,510 $26,960 $33,694 $420,610 $487,780 $7,280 $73,450 $421,610 1.90 33% 5.41x
WebMD WBMD $652 $153 $109 $9,259 $2,330 $2,210 $691 $593 $2,308 $0.07 24% 3.54x
Pandora P $1,230 -$112 -$82 $1,153 $2,580 $2,690 $239 $349 $2,580 $0.88 -9% 2.10x
                           
Median   $4,830 $320 $109 $8,888 $30,770 $35,490 $1,250 $2,070 $30,760 $0.88 24% 5.41x
                           
Gaming                          
Activision Blizzard ATVI $4,840 $1,590 $1,290 $10,343 $31,510 $28,290 $5,840 $2,870 $31,260 $0.30 33% 6.46x
Electronic Arts EA $4,400 $1,080 $1,220 $1,349 $20,090 $22,540 $1,150 $3,830 $19,860 $1.76 25% 4.51x
Zynga ZNGA $768 -$26 -$1 $0 $1,400 $2,220 $0 $857 $1,363 --- -3% 1.77x
Take-Two Interactive TTWO $1,410 $89 $261 $1,089 $2,220 $3,150 $498 $1,270 $2,378 $0.89 6% 1.69x
                           
Median   $2,905 $585 $741 $1,219 $11,155 $12,845 $824 $2,070 $11,119 $0.89 15% 3.14x

 

In summary, we expect the funding environment for startups to stabilize, but we don’t expect it to return to the environment we saw in Q4.  So as a founder, ask for a valuation that you can live with and that an investor could reasonably be expected to show interest.      

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