The “Execution Risk” Angle to Valuation

Bold claim (screw it, wish me luck!) - I’m pioneering a new category - Operator Equity Research.

My goal is to create the best valuation and performance benchmarks specifically for tech operators. If you are in Finance, Strategy, or Operations, this will help you translate what the outside world values to your target operating model.

The “Execution Risk” Angle to Valuation

I was speaking with a friend who’s a growth stage investor (Series A through C) this past week. Regarding valuation he told me:

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“The big disconnect we often have with operators is understanding what the metrics mean for them. People often point at the public comps when they’re a $5M to $20M ARR business, which is nonsensical… you can’t expect people to give you the same credit as a business that’s 10x your size with the same metrics.”

What he was getting at is the inherent execution risk in betting you can achieve that scale… and also still have the same margins and growth rates. It’s really hard to get to that size. It takes time + timing + execution + luck. And all that needs to be priced in.

Is it a 3x multiple discount? 4x? IDK. But it’s not nothing.

Achieving a 130% net dollar retention rate at $250M in revenue with 50% annual revenue growth is MUCH harder than doing it at $25M.

Plus, the vast majority of businesses whiff on the forecasts they put in their pitch decks. Seriously - almost none actually do what they say they will do. So the investor perspective is that price needs to be adjusted for the level of perceived risk. It’s not a precise science, but that’s how investors think about it.