1/12: I’ve been asked a lot why there’s so much variance on “valuations relative to traction”. Some companies are getting 100X ARR multiples while others are getting 2X. There’s no simple answer but a big driver is if a company can demonstrate “Multiplicative Momentum”.
2/12: Every talented Investor eventually comes to the realization that Momentum is one of the most powerful forces in the growth (and therefore valuation) of a Startup. Momentum is a very simple Physics concept that ports nicely over to the business world.
3/12: The Physics formula for momentum is: P=MV (Momentum = Mass X Velocity) but the easier way to think about it conceptually is “mass in motion”. In business terms, it matters how large a company is (mass) and how fast it’s growing (motion).
4/12: The reason why “mass in motion” matters is best described by Newton’s First Law of Motion. “An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.”
5/12: In simple terms, this means that for any given driver of a company’s growth, it should continue on its current trajectory unless an “unbalanced force” emerges. The implication is that a company’s forward growth rate is highly correlated to its current growth rate.
6/12: So many early stage companies commanding 10X+ revenue multiples are growing quickly and investors can project what a few years of growth will deliver. $1MM ARR becomes $3MM ARR becomes $9MM ARR becomes $27MM ARR.
7/12: But there’s a special class of company that has the potential to grow even faster than simple Momentum would suggest. The commonality in these hyper-growth companies is that there are multiple drivers all experiencing Momentum at the same time.
8/12: Imagine a company with two or more key drivers each growing at 2X. Compare it to a company with only one driver growing at 2X. In 3 years, one company is 8X its current size while the other has experienced 64X growth!
9/12: The math of “Multiplicative Momentum” is so stunning that it needs to be experienced to be believed. But once it’s been experienced by an Investor they know how to spot these types of companies and are willing to pay-up early.
10/12: I’ve seen a “marketplace model” where a hyper-growth acquisition engine created negotiating power with vendors and transactional pricing power with businesses that wanted access to its active customer base. Customer Momentum X Margin Momentum = Magic.
11/12: I’ve seen a “payments platform” that was scaling its customer and merchant bases quickly but also benefitted from customers being able to transact with one click after their initial transaction. More Customers X More Places to Transact X Less Abandonment = Magic.
12/12: The TL:DR is that valuations are a reflection of what a company is likely to look like AFTER deploying the money, not what it looks like at the time of the funding event. Companies with “Multiplicative Momentum” command different valuations for a good reason!
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