How to Value a Private Company: VC & Growth Comps

The job of a venture capital (VC) firm is to find winners early. That means making big bets on high potential founders, technologies, business models, and even new industries.

Funding rounds from VCs help other investors and corporates understand how to value companies based on their potential rather than their current financials.

If you’re a growth equity investor pitching a VC-backed company or a corporate investor/acquirer trying to work with a VC-backed company, knowing the VC comps and your prospective investment’s “next best alternative” is critical for your decision making.

Below, we dig into what exactly VC & growth comps are and how different kinds of investors can use them to value private companies.

What Are VC & Growth Comps?

Venture capital (VC) and growth comps provide comparable minority transactions for high-potential companies you’re evaluating, whether for a minority investment or a full acquisition. They are determined by similarities to the target company’s product or service offerings, business model, and end customers.

VC comps are based on valuations of venture-stage companies. They are typically funded on the named “series” track — i.e., seed, Series A, Series B, Series C, etc. These comps are based on the round name (which signals scale), valuation (which is difficult to get), traction, and potential.

Growth equity comps are very similar, but they are announced as “growth” rounds or “$X investment” without a “letter” attached.

How to Use VC & Growth Comps to Value a Private Company

In the VC world, specific deals matter. While medians were important for public comps, that does not hold as well for VC deals. This is because high-potential companies are often unique and differentiated. You will find yourself pointing to a few specific deals rather than averages.

Finding the Right Comps

But finding the right deals can be a challenge itself. Most companies try to position themselves as being different from their competitors. (To their credit, they often are fairly unique.) This means more work for you, as you’ll have to sift through marketing language.

So what happens when your target company is the truly unique first-mover in a space?

It comes down to finding the right similarities, whether that’s similar products or services (even if they’re sold to different customers), similar customers (even if the products/services are different), or similar business models. Again, identifying these can be challenging, and it often requires deep sector expertise from your partners.

Another layer of complexity here is the round type. Seed-stage companies look very different from Series A’s; A’s are different from B’s, etc.

Using the Comps

Okay, let’s say you’ve found the right set of comps. Now how do you actually use them to make decisions?

A simple formula for projecting potential is traction (size) * growth.

Source: Grata

To use this, you need to know the right multiple. For this purpose, focus on EV/Revenue instead of EV/EBITDA, since most early-stage companies don’t generate profits. They often raise money because they are not generating profits and require capital.

Calculating Valuation

The first part of the multiple is the valuation. Large companies like to flex when they reach “unicorn” status by attaining a $1B+ valuation. It helps for recruiting, company morale, and, of course, those egos. Now, that’s great for late-stage companies — but how do you get valuations for early-stage companies, which account for the majority of VC deals?

This is really hard. In some jurisdictions, you can access obscure filings that can help you piece the valuations together. In others, there’s virtually nothing. Calculating early-stage valuations requires highly proprietary data and the knowledge of people involved in the deal.

One way to estimate from the outside looking in is to assume dilution benchmarks at different stages and back into valuations based on the amount raised. Seeds will take 15-30% dilution, Series A 15-25%, Series B 10-20%, etc.

Estimating Revenue

So let’s assume you have a sense of the valuation. You’re still not done. You need to know revenue.

Asking a founder about revenue outside a formal pitch is often taboo, and they likely give a vague answer about how many employees they have. At best, you’re going to get a rough customer count and you can estimate revenue by multiplying that by their average price.

Another way to get revenue is asking a peer VC. But again, if the VC made the investment, chances are they’re going to be guarded with revenue and under confidentiality anyway. Sometimes your best bet is asking other VCs who passed on the deal, since they rarely sign NDAs with prospective investments.

But let’s say you’re not in the know and you’re trying to find the revenue from the outside-in. You’ll need to use proxies. The best one for VC-backed companies (mostly in the tech industry) is headcount. You can find this information on Linkedin, but there are a few issues with this method:

Linkedin will give you today’s headcount, not the headcount at the time of the deal. You may need to buy Linkedin Premium to see historical data.
Startups tend to have their early investors and advisors on their Linkedin profiles, so numbers can be inflated.
Startups may employ contractors across the globe, which could make the company look bigger than it is.

Calculating Growth

Headcount growth is also one of your best proxies for growth. Remember, venture-backed companies are typically not holding headcount constant because they’re not focused on profitability. While you’re on Linkedin, you can check the Insights page for the growth chart. Be careful to take the growth at the time of the deal — don’t include the hiring surge that happens right after.

If the tech company you’re benchmarking doesn’t need many employees, such as a consumer tech company, you can try web traffic benchmarks to estimate growth. SimilarWeb, while it has its limitations, is considered the industry standard for web traffic.

Lastly, one of the key factors in VC comps is scarcity. You know the competition. If you’re funding the second player in the space, you need to have really high conviction on second-mover advantage. If you’re funding the third, why will they be better than the first two, which already have funding and momentum behind them?

How to Use VC Comps as a Growth Equity or Growth-Focused PE Investor

VC comps don’t just help venture investors. Many growth equity firms invest in venture stage companies that are moving off the venture track. Knowing valuations is critical since few founders are willing to take a down round.

Additionally, if you’re going to enter closer to venture valuations as a growth investor, you need to know what your entry point should be. Founders often expect close to venture valuations even as they depart from the traditional venture track.

When modeling exits, you need to be thoughtful about your exit multiple. Knowing how multiple compression flows through the funding rounds, and what to expect 1-2 rounds after yours, is critical for your models since multiple compression needs to be offset by growth.

How to Use VC Comps in Corporate Development

Strategic acquirers can often pay premiums because of synergies and accretion. Knowing venture valuations and comps helps them compete with a founder’s next best alternative of raising money.

Venture valuations also give corporates an understanding of what offers the company’s founder is expecting from VCs and growth equity firms, which enables them to be competitive.

How to Use VC Comps in Investment Banking

So if you’re in investment banking and your sell-side clients exit to PE and corporates, why should you care about VC comps? Investment banks need to have a pulse on venture markets as well. Remember, if you’re an MD pitching to founders, you need to know what valuations they’re used to and expecting. Otherwise, you could be vastly off on valuation and lose the bakeoff before it ever started.

VC comps, specifically valuations, also help with business development. You may find some hidden gems you thought were too small or too “startup-y” that have valuations that fall directly within your middle market expertise.

How Grata Can Help

If you’re interested in using VC & growth comps for private market investing, Grata can help. Our Market Research product, which is powered by our award-winning AI search, helps investors scope any market and find the most accurate deal data and comps so you can win more deals.

With just a few clicks, you can access funding round series, amount, estimated post-round valuations, employee headcount, and more to understand your market’s VC & growth comparables.

Thanks to our proprietary AI algorithms, you can find the right comps for a single company. For example, if you’re interested in a specific healthcare facility like Ernest Health, which operates a network of inpatient rehabilitation hospitals and outpatient facilities, you can search for the company and click “Generate Market.”

Our AI identifies similar companies to create the market and the appropriate public comps.

Source: Grata

You can also find the right comps for market segments. Here’s an example of VC & growth comps for the hospitals market, which we recently covered in our PE Playbook: Healthcare Practices: