Investors will place a lot of weight on recent performance. Anyone can type big numbers in a spreadsheet 😊

Finding similar companies that were sold or which have raised money recently gives you an idea of what multiples to use, and those benchmarks give investors confidence that your valuation is realistic. You may find Crunchbase.com a useful source. If you are early stage, revenue multiples are probably the default, although if you are already profitable EBIT can also be used. When finding benchmark companies they should be as similar as possible. Growth rates are also an important driver of value, so showing where your growth sits relative to those companies will help you decide which multiple to pick. There is unlikely to be a perfect match so this is an art more than a science, and using a range of values is also fine.

The other thing to factor in is that if you are raising money today rather than selling the business in 5 years, then the benchmark revenue multiples you find would be applied to your most recent annual revenues, not the forecast in 5 years. So if you made $1m in revenue in 2022, and the benchmarks suggest a revenue multiple of 4 is realistic, your value TODAY is c.$4m.

Then, you can show the potential long term value if you hit your long term plan targets, and the financial model will show that. But investors will heavily discount those values, to reflect the perceived level of risk and “time value of money”. The more you are able to demonstrate that you have solved the key challenges in your way, and grown successfully over the past year, the lower that discount rate will be.