Check the Comps

Below is the ‘Tip of the Week’ from Ep68: The Bloomberg for Private Companies, Part 2 (Anand Sanwal)

I often speak with investors about potential startup investments… and more often than not the conversation revolves around customers, competitors and mass market viability. All fine. But rarely, do I ever hear about the comps, or comparables. Investors will be asking;

  • “Are the growth rates for this startup below, at or above the norm?”
  • “Are the revenue numbers where they should be?”
  • “How should they be addressing virality and existing customers as a marketing channel?” or
  • “What monetization method will be the killer business model?”

Those are great questions and ones where there may be some precedent. Here is where comps can be of great value. On a recent episode of investor stories, we discussed an investment in a company called Cybrary. When my investment partner, Jeff, and I were reviewing the numbers, we were astonished by the startup’s growth. But that didn’t tell us if they were better, worse or the same as other similar companies. The growth numbers also didn’t tell us where we should price the deal, if we decided to invest. Should this be a one, a three or a six million dollar valuation? The answer was in the comps. This was a startup atthe seed stage, could be classified as a verticalized social community, also could be considered edtech, it was in the Cyber Security sector and finally was located in the greater Washington D.C. area. This allowed us to look at comps for startups w/ similar characteristics. Those recently raising rounds in greater D.C. Startups raising at the seed stage in cyber security. Startup growth rates and revenue within edtech. And, of course, growth and monthly active users in social communities. This is part of why SaaS investors love to invest in SaaS. It’s much easier to compare apples-to-apples and make an investment decision, when you can compare hundreds of different companies with the same business model.

In doing this, we not only saw how Cybrary stacked up against others and we not only determined the appropriate valuation that they should raise at, but we also got some insight into who they might become. Companies like Github could provide great insight their current position and where they might evolve to.

No two companies are the same. And we are in a constant state of change where the landscape today looks much different than tomorrow. But this should not be an excuse to ignore the past and what those are doing around you. Those investors evaluating companies in a vacuum and those startups building as if they are in one… may have trouble ever getting out.