One of the questions I get asked often by entrepreneurs is how they can build a really valuable business, and what metrics they should consider. It's a big question and there are so many qualitative and quantitative as well as subjective parts to this.
At a high level, the answer is that when you reach scale, the business will be valued by the size of your potential market opportunity, your demonstrated leadership and growth in the market, based on some differentiated and defensible advantage* with a business model that shows real financial leverage. And of course there will be many other elements such as the quality of your team and the trust in your brand.
Looking at the business model, I have been lucky enough to work with some terrific investment banks over the years while building, taking public and selling companies and asked Goldman Sachs to share the work done recently around SaaS and Cloud companies where I focus my investing.
And here is Goldman’s full document that highlights the wide variety of valuations (2-13x revenue) that when deconstructed into unit economics and growth, actually raises more questions than provides answers. Hence my point at the start about some of this being qualitative and subjective. However it’s a useful breakdown, and has stimulated great discussion at our workshops. Please feel free to add your comments and questions below.