Comparable companies for a startup valuation should sell to the same customers at the same prices as your company. Companies that only use similar technology make poor comparisons, because investors pay for the market a product sells into.
The company makes a scanning device for farm animals. It uses ultrasound and AI to spot a problem that today can only be found after the animal is processed. It has no revenue yet. The founder asked us for two things: a valuation to raise a seed round on, and a 60-month financial model behind it.
With no revenue, you can't value a company on its sales. So we used our six methods. Some look at the team and the risks. Some compare the company with others that have raised or sold. Some work from the cash the business should make later. Each one gives a number, and we blend them.
Where the comparable companies went wrong
Comparison methods are only as good as the companies you compare with. The first version picked companies that use similar technology. Medical ultrasound start-ups, and a couple of exits worth more than $1B.
On paper that made sense, because the device works a lot like a medical scanner. But investors don't pay for the technology. They pay for the market it sells into. Medical devices sell to hospitals at hospital prices. This device sells to farms and meat processors, at farm prices.
We review every valuation before an investor sees it. Our review of this one said it plainly: stop valuing this company like a medical company.
What we changed
- We cut or discounted the medical-imaging comparisons
- We took the billion-dollar exits out and used realistic exits from livestock and farm technology
- We swapped broad ag-tech comparisons for companies that sell to the same buyers
That pulls the number down. We told the founder so before anyone else saw it. A lower number that holds up is worth more than a high one an investor takes apart in the first meeting. Once an investor finds one comparison that doesn't fit, they stop trusting the rest of the report.
The model had a second job
The 60-month model has three cases: base, bear and bull. The bear case showed something the founder needed to see. On a small raise, the company would run out of cash within months, before its first sales.
So we planned for it. We worked out with the founder how much he needed at minimum to start. Then we added a short-term loan and equipment loans to the model, so the bad case has a way through.
Why this matters for your raise
A valuation is an argument, and investors check every step. If your comparisons flatter you, the whole thing falls over. If they look like your real business, the investor argues about the details instead of the method. That's a much better meeting to be in.
Compare yourself with companies that sell to the same customers at the same prices. Matching technology isn't enough.
Questions founders ask
How do you choose comparable companies for a valuation?
Start with who the company sells to and at what price, then find companies that sell to the same buyers. Look at how they make money, their stage and their realistic exits. Technology is a weak filter on its own. Cut or discount comparisons that don't fit, and leave out outliers like billion-dollar exits, which pull the number up without telling you much about your company.
What makes a good comparable company?
A good comparable sells to the same customers, at similar prices, with a similar business model, and it's at a similar stage. For a farm scanning device, that means livestock and farm technology companies. Medical imaging start-ups don't fit, even though the devices work in a similar way. When an investor can see why each comparison fits your real business, they argue about details instead of the method.
Can you use public company multiples to value a startup?
You can use them as a reference point, but not as they are. Public companies are bigger, they have revenue, and their shares are easy to sell, so their multiples usually need a large discount for an early company. For a pre-revenue startup, private rounds and exits in the same market often say more, used alongside methods that look at the team, the risks and future cash.