Public Comparables Part 1: The role of public comps in VC exit math

Hi! I’m glad you’re here. You’ve made it to issue #9 of VC Demystified🪄.

My name’s Nicole - I’m a Principal at an early stage venture fund, and I know firsthand that VC can often be a black box. Breaking into the industry may feel daunting and resources can seem scarce and inaccessible. I wanted to put together a newsletter to give others the playbook I wish I had when I first started.

Happy Summer everyone! We’ve officially crossed over into the new season so depending on where you are that means you will be enjoying more sunshine over the next couple of months. People say VC slows down during the summer months, but I’ve been seeing a lot of quality job openings pop up lately, which means things are still moving! A perfect time to land your dream role.

Today’s deep dive: How to perform a public comparables analysis to evaluate a startup’s exit potential

My personal mission is to open as many doors as possible for other people and this newsletter is just one avenue to do that. As always, I will continue to post VC insights daily across my socials for those of you who prefer those channels.

How to perform a public comparables analysis to evaluate a startup’s exit potential

VCs decide to invest or pass on an investment based on the exit potential of a startup. After all, a VCs #1 goal is to “return the fund” for their Limited Partners.

At the early stages, it can be hard to project out a startups exit value. There are simple models that some VCs use to do that. I shared a walkthrough of a VC exit model in a previous newsletter issue here. If you haven’t checked that out yet, I encourage you to do so before jumping into this post.

There are two major levers that drive startup exit values:
(1) Exit revenue
(2) Exit multiple

Again, check out my VC exit model post to give you a sense of how VCs model out potential returns and where/how exit revenue and exit multiples play a role.

Exit revenue is typically calculated through a revenue projection model where you make assumptions around year-over-year growth and churn. The ideal VC-backed startup timeline to exit is 7-10 years so the projection model should forecast revenue out at least 7 years. Often times, a good exit revenue to strive for or use in your model is $100 million.

But how do you calculate an exit multiple?

This can be a bit tricky if you don’t have a finance background prior to VC and it’s one of the must-know technical skills for early-stage venture.

The way you do it is by performing a public comparables (comps) benchmarking analysis. That’s what I’m going to take you through here.

Let’s get into it!

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