Key Driving Factors Of Valuation Multiples Of Unicorns
Trefis has recently analyzed several tech unicorns (private companies valued at more than $1 billion) to understand their valuation drivers. Since most of these companies are not profitable yet, revenue and revenue growth are the key valuation drivers for these companies, as well as an eventual path to profitability. Their valuations are largely based on revenue multiples, applied on their projected revenues for the next few years. Our interactive dashboard Is Revenue Growth Driving Revenue Multiples Of Unicorns? analyzes if revenue growth is the only factor behind the varying valuation multiples of the unicorns in our chosen universe. This analysis an be useful for estimating the revenue multiple of a company and making your own assumptions in the dashboards we have created for these companies. You can find links of the dashboards for each of these companies in the References section.
Most companies chosen for our analysis have shown strong historical revenue growth, which is likely to continue through 2018 and beyond.
However, revenue growth varies from company to company, with WeWork likely to grow its revenues by more than 75% and Warby Parker’s estimated revenue growth is around 30%. Even some companies with similar projected revenue growth command different valuation multiples.
Our analysis finds that social media companies such as Pinterest and Quora command higher revenue multiples compared to companies such as Lyft, WeWork and Eventbrite. While revenue growth is likely to drive revenue multiples, it is not the only determining factor. As mentioned previously, many companies with similar projected revenue growth have significantly different revenue multiples. The following additional factors are likely to impact valuation multiples:
- Improving margins along with an increase in revenues (lower incremental costs of acquiring new customers, economies of scale) is one of the key drivers of revenue multiples. Companies such as Pinterest and Quora are able to increase their revenues by generating higher average revenues per customer (by attracting more advertisers to their platforms) and costs of new customer acquisition are lower. Further, for social media players, a larger customer base leads to a better customer experience for all customers, thus value addition by increase in number of users is higher.
- Companies such as WeWork and Warby Parker are likely to command lower multiples as their costs associated with growing revenues are higher. So high revenue growth does not automatically translate into higher profitability.
- Lyft’s revenue growth is also associated with discounts and deals, and therefore the profit potential once these customer-attracting measures are stopped or slowed is less certain. The ability to maintain future revenue growth and predictability of this growth is another factor determining the valuation multiple.
- Expected industry growth and competitive advantages of the company are also determining factors.
Interested in applying your own valuation multiples to arrive at valuations of unicorns ? You can use our interactive dashboards for these companies by clicking on the links below :
Trefis Dashboard for Pinterest
Trefis Dashboard for Eventbrite
Trefis Dashboard For Warby Parker
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