When Should You Sell Your Startup?

In a recent article, Tunguz from Redpoint takes a stab at the age-old question of “when should I sell my start-up?” As most of you have already expected, the answer to that question is unique to different situations. To help figure this out, Tunguz invites the readers to think about a more tangible, but related, question–when is value maximized? Specifically, “when is a company’s value maximized, given a declining growth rate?”

A startup’s value is highly correlated to its ability to grow, the linear relationship between its Enterprise Value and its TTM Growth rate is shown below.

The R^2 between growth and ev/ttm

Given this correlation, Tunguz concludes that “Just because the business grows doesn’t mean it increases its value. It has to grow at a certain rate to be worth more.”

Take a look at the three different scenarios of declining growth rate:

Comparison of scenarios for EV of company when growth rates are falling

In the last scenario, the EV of the hypothetical company actually falls despite a 25% increase in revenue.

So to answer the original question– the best time to sell is before it decreases in enterprise value.  Tungus explains further “Startups are valued for their growth. At some point, if the business can’t grow fast enough, its enterprise value will fall year over year.”
Source: TOMASZ TUNGUZ

Posted in: PE/VC News, Selling Your Business

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