TLDR:
– Multiples are a tool used in venture capital for analyzing company value.
– Over the past decade, a younger cohort of investors has been using multiples more aggressively.
Article Summary:
The article discusses how venture capital (ab)uses revenue multiples as a tool for quickly analyzing company value. There is a generational divide in the use of multiples, with younger investors using them more aggressively in the past decade. The origin of multiples can be traced back to public markets where metrics like EV/revenue, EV/EBITDA, and P/E are used to understand company performance relative to share price. However, there are fundamental problems with using multiples in private markets.
One of the issues highlighted in the article is the lack of data in private markets, making it challenging to find comparable companies for valuation analysis. Multiples are also procyclical, leading to a tenuous connection between price and value, which makes venture capital more vulnerable to inflationary cycles. Additionally, pricing with multiples may not accurately reflect the true valuation of category-defining startups.
The article emphasizes that multiples should be used as a tool for comparing and analyzing valuations, not as a shortcut for calculating them. The role of multiples is to provide context and understand trends in the fundraising market. Crude comparisons lacking specificity can lead to bubbles, damage returns, and do a disservice to outliers in the venture capital space.
