Valuation: UK vs. US start ups
After over 400 deals analysed in the last 12 months I can track important conclusions about the difference in approaching seeds founding between UK and US start-ups:
US start ups are much more expensive!
The average UK investment round is 50% lower than the US ($1.8M vs. over $3.0m);
Both US and UK start-up are selling around 18% of their shares during the round;
Over 90% of UK founding deals are equity deals compared to around 60% in the US (where Convertible Debt and SAFE are gaining market share in the typical founding round).
Lets focus on the valuation part for now.
From my deals database US companies raise money with an average pre-money valuation of 36.0x the Forecasted Revenues (12 months forward) while for a UK start up the average valuation is 19.0x the Forecasted Revenues.
While it is fair to expect a higher valuation multiple for a US start up (the US market is over 6 times bigger than the UK market in terms of potential consumers and the Angel-VC ecosystem is much more mature), is it justifiable a 90% valuation premium?
The implicit valuation of the UK and US securities help us to understand part of the valuation gap
Currently the Nasdaq 100 is trading on a one-year forward price/earnings (PE) ratio of 21.3 times, while the FTSE All Shares is trading at around 23.0x. The public markets are not rewarding the US stocks with a premium compared to the UK stocks.
The above analysis is just part of the story because the FTSE all shares include all sort of companies different from the Nasdaq 100 that include just technologies companies.
So lets try to improve our analysis with like for like comparison.
Lest compared Grub Hub vs. Just Eat, the market leader for restaurant foods delivery platform. Both companies are growing around 20% per year and registered EBITDA margin of around 30.0%.
GrubHub trade @ 10.0x the Revenues, Just Eat at 11.0x.
Lest try with the Real estate market portal Rightmove (UK) and Zillow (US). Zillow trade at 9.0x the Revenues, Rightmove at over 15.0x the Revenues.
The listed market are not the reason for the much higher valuation pre money of the US start-ups vs. UK start-ups.
The expected growth rate of a start-up could be the key reason for the valuation gap.
In my experience US Founders are on average are much more positive on the prospect of their company and assume a revenues growth rate in the coming 12 months much higher than UK Founders. US start-ups forecast on average a YoY revenues growth rate of over 50.0% compared to an average growth rate of 25%-30% for the UK companies.
But is it enough to justify such big valuation premium?
Bottom line: are the UK start-ups undervalued? Should an Angel based in UK not looking for US deals?