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An IPO marks the realization of an investment, and whether it bursts through the gates or flounders can affect the rate of return. There are no tell-all or by-the-books signals that will immediately point to a startup going public, but we try to shed some light on IPO indicators that we've seen in the past.
Whoa, hold your horses there. It’s not quite time to file that S-1.
We’ve historically tracked several indicators of startup IPO-worthiness, as we discuss below.
A typical startup today will wait until they’re an “established” company, with the ability to prove its business model from a revenue or profitability standpoint. This usually translates to $100mm or more in revenue. Today, IPO-worthy startups are also much older than in the past. According to CB Insights, the median time between first funding and IPO for startups was 10.1 years in 2018, compared to 6.9 years in 2013. They’ve also typically raised several rounds of private capital and upwards of hundreds of millions of dollars.
However, for most late-stage startups, an IPO is still a daunting milestone.
To help wade through the waters (sorry, Marky Mark, unfortunately we can’t help you), a company will also typically hire a high-profile CFO with public company experience to navigate the required regulatory and financial disclosures. A CFO hire will also usually be accompanied by job postings for other legal, investor relations and finance roles, signaling an IPO may be on the horizon.
Furthermore, startup CEOs will often directly hint that the company is considering an IPO (see Uber). In other words, keep up to date on any company news! You can generally expect companies to go public during bullish markets, since companies want to pursue IPOs in receptive market conditions. Finally, keep in mind that because private companies can keep their intentions of going public a secret, it is impossible to predict for certain whether a company is seriously pursuing an IPO until it files its S-1 publicly. However, the above represent some leading indicators of just that.
These days it feels like every other day you hear about a new startup joining the unicorn club. By Wall Street Journal's account, there are 162 companies valued at $1 billion or more! So, it's a great question to ask how exactly you value private tech companies, and what goes into these billion dollar valuations. Below, we've provided a quick walk through on how we think about startup valuations. Without further ado...
Valuation exercises for private tech companies are difficult. The reality is valuations only speak to a company’s worth at a specific time and are only as accurate as the information that is available to analyze. That information includes internal and external factors impacting a company, and as times goes on, the weight of each factor on the valuation can change.
So what internal and external factors must one account for in a valuation? We’d love to say you need to take “xyz” into account, and–voila–you have all the inputs to value a private tech company. Unfortunately, it’s not that easy, and it’s usually dependent on what’s publicly available (which can be very little). Below are some factors that help us get as close as possible to the bull’s eye.
You might be saying at this point, “wait, the company is private. There is no way I’m getting internal financials, let alone projections.” Well, you’re right – internal factors are rarely publicly disclosed. As a result, it’s important to understand that valuing a private tech company is imperfect – there are information barriers that hinder the ability to have a perfect picture of a company’s value. This usually results in forgoing a discounted cash flow analysis or any other kind of intrinsic valuation analysis.
As a result, we often rely on comparable company multiples, where we find similar companies to the one we're trying to value and see where those companies trade from a Valuation to Sales perspective (i.e., P/S multiple), whether in the public or private funding markets or in an M&A transaction.
We’ll consider other inputs as well, like the external factors we mentioned above, and throw in a few more, like the most recent funding round, management team, and recent news coverage. Valuation exercises are and should be centered around facts – assessing the factors above – to determine a share price. For more details on other valuation methodologies that we use at EquityZen, check out our valuation guide in our Knowledge Center.
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