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Exit Valuation

Often in pitch event or in meetings with founders I am presented a chart about the exit options.

Usually they present 2 scenarios:

  • Trade Buyer

  • IPOs

So far so good. But if you ask them who are potential trade buyers, 75% of the times I received the following answers: Google, Amazon, FB or Alibaba (a new comers in the founders preference).

This answer leaves me puzzled. Does the founder made any homework? The big tech giants are very selective in their acquisition target and on average they buy no more than 3-5 companies per year.

What is the probability to be bought by a tech giant? Zero

I would be much happier if the founder present to me a list of 10 potential realistic buyers. Companies operating in the same sector and can really get some value acquiring the target company.

The expected exit value is another interesting topic. Using the company financial assumptions, I create a best-case scenario multiplying the revenues in year 5 to the average multiple of the sector.

If it’s a marketplace the multiple is between 6.0x-10.x the revenues, if it is an e-commerce business 2.0x-3.0x, for a Fintech player the multiple can reach 15.0x.

This simple equation often translates in future tech unicorn, or at least exit value north of $500m.

Again, stats help us to understand the probability of such scenario. In the last 10 years just 157 companies have been sold for a valuation >$500m.

US Exits by Value

US Exits by Value

Considering a total of 7,900 exits in the last 10 years, the probability to exit at over $500m is less than 2.0%.

In Europe, the average exit value if £75m. This is why considering that in my investment I need at least a 10.0x Return, I rarely invest in company with a pre-money valuation over £5.0m.

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