What is the Gross Profit x Competitor’s Multiple Startup Valuation Method?
The meta image for this post was created with DALL-E 2 as the result of using the prompt "A hummingbird in a forest drawn in a mannerist style".
What is it?
The Gross Profit x Competitor's Multiple method is based on a simple formula:
Gross Profit (i.e. Last 12 months) x Competitor's Multiple
It is thus evident that this method is to be applied to startups that have already conquered the no-revenue threshold and are growing at a healthy pace.
The idea behind this simple formula is to use the Gross Profit magnitude as a solid indicator of growth, company health, and market penetration. The Competitor's Multiple stands as a comparative measure against other companies in the same sector that are already public. The multiples to be chosen depend heavily on the analyst, being some common ones the Enterprise Value / EBITDA or Enterprise Value / Revenue.
A post about all possible valuation multiples focusing on startups would be long enough on its own, for more information you can check this post.
The investopedia definition describes a multiple as a way to measure some aspect of a company's financial well-being. The way I like to interpret it is as a ratio that evolves every year depending on how other public companies in the same sector perform, that one can use in conjunction with your startup's Gross Profit to get an idea of where your company stands compared to them.
Let's imagine you have your agriculture startup focusing on developing a serum that helps protect lettuces from a very specific pest of your region. Last year's revenue was
Taking a look at similar public companies' financial statements we draw an average EV/EBITDA multiple of 6x.
The final valuation of our startup would be:
$235,500 x 6 = $1,413,000.
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