I agree on both your points.

1) With regards to growth rate, I think the valuation multiplier would factor in the growth rate. If you have 2 businesses with $10M in rev, and you are using a Revenue multiple rather than a profit multiple to calculate value, then the multiplier would reflect the growth rate. For example a mature $10M company like a golf course that might be growing at 10% a year or so, but is relatively mature would maybe receive a valuation of 1-3x, so would be valued at $30M. A internet company that is at $10M in rev, but is growing at 10% a month and is on track to grow substantially would receive a much higher valuation multiple, perhaps 10-15x, and this then would be reflected in its valuation of $100 – $150M.

2) I definitely agree on your second point. The higher the retention, the greater inherent value in the business. If a business has a churn of 50% a month and another one in the same area has a churn of 15%, meaning it is losing 50% of its customers to cancellation each month, then the first company would have to expend significantly more marketing resources just to stay at its present level.

Great points, thanks for the conversation on this topic.

Cheers, Chris

1) How should pace of growth influence the valuation multiple? If two similar businesses both have $10M in LTM revenue, and one has enjoyed 3x revenue growth for each of the past 3 years while the other has enjoyed 1.5x growth, the 3x guy is worth (a whole lot) more. How might one calculate the valuation premium for the 3x guy?

2) All other things being equal (i.e. revenue, cogs, expenses, etc) ought the business with the higher retention rate enjoy the higher valuation?

Thanks for your comment. I agree, churn rate is a very important factor. I think that often companies quote their growth rate but neglect the churn rate. How would this work as a true metric of growth:

True Growth = New Subscribers – Cancellations – Inactive Users

Would that account for it?

How might one consider churn and pace of growth in their valuation calculation? Thanks for the great post and comments.

That is really interesting analysis too. It is very interesting how you come up with the marginal increase in valuation per 1000 users ad it is relatively similar to the numbers we arrived at. Thanks for taking the time to contribute.

Chris

Assume a plan based on trying to dress the respective companies for acquisition (e.g. beefing up revenues in forward looking 6 months). Presumably, this comes from (a) increased # of paying users and (b) increased pricing. Presumably, the easiest to calcuate would be (a) increased user base.

Aside –
It could be instructive to look at clickthroughs, subscription, and conversion rates in order to back into the ad-spend required to up the valuation.
– End Aside

For instance, assuming a 5% subscription (to free account – this is a web retail standard: e-consultancy.com) of all users who visit the site and taking your .96% of users pay figure we get .048% of unique visitors wind up paying.

We could then arrive at: [Desired Marginal Increase in Unique Monthly Visitors]/.048% = Marginal Number of Uniques Required per Month.

$47.30 average price per user (based on your spreadsheet)X 12 = marginal revenue per user/per year X 8.87 = marginal increase in valuation per additional user of $5,034.65

So, roughly, for each additional 1K paying users per month, Basecamp increases their valuation by $5,000,000

Dividing a Desired New “Paying” users of 200 by .048% = ~416K new Uniques a month

——-
BTW, I suppose I also could have taken the easier route and divide the valuation ($50,00,000) by the total number of 1,000 users (9.6) to get approximately the same figure for marginal increase in valuation per user …

Thanks again.