Valuing a company based on assumptions from previous funding rounds can be flawed, especially in today's market downturn. Instead, it is more effective to look ahead and focus on where the company is heading and how to get there. If the goal is to eventually go public, sell to a public company, or engage in an M&A with a large private firm, a good starting point is analyzing the current state of public markets, specifically how publicly traded companies in the same industry are performing.
To value a company by looking forward, it's important to use multiples that are in line with the industry. Startups, especially early-stage ones, may not have any sales or clients, making it challenging to determine a realistic multiple. In these cases, it's necessary to project into the future and work backward. For example, projecting five years ahead and estimating the company's potential annual recurring revenue at $100 million, one can use a suitable multiple of 20x to arrive at a valuation of $2 billion. Working backward from there, an investor investing 2.5 years prior may value the company at $800 million, and the current valuation may be around $300 million.
This valuation approach allows startups to account for their growth trajectory and project a valuation based on industry multiples. It is important to validate these assumptions with later-stage investors and ensure that the projected future funding and milestones align with expectations. Additionally, if there are changes in the market, the valuation model can be adjusted accordingly by monitoring public market multiples.
While one may argue for a higher valuation, using industry multiples provides a clear range for valuation estimation.