This is insane to me. I work at a startup with a similar valuation and we bring in almost double that amount of revenue a week... and I think we're overvalued.
20x Price-to-Sales (P/S) multiple on trailing-twelve-month (TTM) revenues is actually on high-end of of sub-$20B SaaS right now -- it's just the new reality. Examples from public markets:
Cloudflare ($NET) TTM revenue is $0.73B and $16.9B marketcap (23x P/S).
DocuSign ($DOCU) TTM revenue is $2.1B with $15.5B marketcap (7.3x P/S).
UIPath ($PATH) TTM revenue is $0.9B with $9B marketcap (10x P/S).
Okta ($OKTA) TTM revenue is $1.3B with $13B marketcap (10x P/S).
I never cease to be amazed at how people value companies based on revenue and not profit. Revenue without profit numbers tell you nothing about how well the company is doing.
I'm not valuing my company solely by revenue, but it's easier to compare the values of startups by their revenues as a good chunk of startups are focused on growth and not profit - and thus aren't yet profitable. Will that start to change with the current macro environment? Probably. Was only trying to point out how out of wack valuations have gotten.
Investors in startups value a company based on the likelihood that they can pawn off a money losing company either to the public markets or an acquirer.
That doesn’t help now that the public market doesn’t have an appetite for companies that aren’t profitable.
So if retail investors aren’t interested in non profitable companies, there is no profit it in it for investment bankers to flip the stock at IPO to take advantage of a “pop” meaning that VCs are less interested in throwing good money after bad.
How have the former “unicorns” focused on “growth” fared in the last few years?
For instance DoorDash couldn’t make a profit during a worldwide pandemic when everyone was ordering takeout.
To do a proper net-present value calculation, you need more than just revenue & profit. You also want to know growth rate, gross margin, and capital efficiency.
I realize that I should have been more precise. I was talking about profit in the colloquial sense where profit = revenues - cost and not the GAAP meaning.
For instance, even when Amazon was “losing money” for years, they were using cash flow to expand. If they were running short of money, they could have just stopped building infrastructure. They had marginal profit unlike companies that are losing money on each sell.
> how people value companies based on revenue and not profit
Profit is a closer abstraction to cash flows (i.e. to the investor) than revenue, but it's still an abstraction. Investors looking at revenues and unit economics can sometimes--often--predict future profits and discount backwards, in the same way that a value investor can look at a company's profits and sometimes--less often, frankly--predict future cash flows from dividends or M&A and then discount backwards.
Profit isn’t an “abstraction”. If you bring in more money than you spend, it means that you don’t have to worry about a “runway”, nor do you have to worry about outside funding.
How can you have a successful business that spends more money than you make?
The term profit covers a number of metrics. All of them are abstractions. The number of assumptions that go into a GAAP profit figure is uncountable. Profit on a cash basis is less wiggly, but it's still--for valuation purposes--useful only inasmuch as it is an estimate of actual cash returns on the investment.
> you bring in more money than you spend, it means that you don’t have to worry about a “runway”, nor do you have to worry about outside funding
Lots of ways for cash-flow positive businesses to be running themselves into the ground. Garden variety is off balance sheet liabilities, though people certainly
> How can you have a successful business that spends more money than you make?
Nobody argued this, not for the long term. But there are loads of situations in which losing money in the short term is the long-term savvy move. (This literally describes all investing. You send cash out when you invest.) Valuation involves estimating the value of those future earnings today.
Amazon famously turned no profit for nearly 15 years. When you run a large business you can do things like reinvest what would have been profit into new projects. This is the whole point of a growth company.
Recognize that, simplistically, Profit = Revenue - Expenses, and that expenses is a dial which can be turned somewhat arbitrarily.
Amazon basically always had positive marginal revenue - unlike most of the startups.
People like to cite the one case where it worked and seem to be forgetting that most of Amazon’s profit comes from AWS. What are the chances that any of these startups are going to pivot to a competent different vertical to shore up their main business? That’s just like saying all you have to do is rehire the former CEO after a 10 year absence and become a trillion dollar company after almost going bankrupt.
And no Amazon did not use “excess capacity to jump start AWS”.
In theory you outspend all of your competitors such that they go out of business or otherwise lose out on the some network effect. At that point you flick the profit switch on and start swimming in pools of money.
I wouldn't like to guess what the success rate of this game is though.
So when will that tomorrow ever come for companies like DoorDash, Uber, Lyft, or the darling former much hyped unicorns?
It’s not a single point in time, most of those same companies who IPOd before becoming profitable recently are still not profitable and being punished by the market more than the market in general.
I don't think that's always true. If you are in that company, they almost certainly have exposure to the cost of those sales and the rate of sales growth, but also the cost to support more users. That gives you a good sense.
If you service has complexity and needs lots of hand-holding and is expensive to generate the sales, then it's harder to say what to do with sales numbers.
Unless you are in the midst of a best market where VCs don’t see a clear exit strategy where they can have a successful exit while the company still isn’t profitable. If you were a startup founder, would you really want to have to depend on continued rounds of funding in this environment?
This is insane to me. I work at a startup with a similar valuation and we bring in almost double that amount of revenue a week... and I think we're overvalued.