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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 “Next Buyer” Angle to Valuation
Last week we talked about how venture fund returns typically follow a power law (e.g., 80% of the returns are generated by 20% of the investments).
As a rule of thumb, investors will often want to see a scenario where any given company could theoretically return the fund 1x.
To take that a step further… Investors are not only doing the math on what they have to believe you can do, but what the person who buys from them will need to think you can do.
This is called the Next Buyer sanity check.
A growth stage investor explained to me:
“You also have to think what the next person has to believe to buy it.
So if you believe it can go from $100M to $300M, you can’t stop there - you also have to believe that someone else will believe it can go from $300M to $600M so they can get their 3x return, too.
Otherwise you don’t have an exit.”
Remember - when a VC sizes you up, they’re not only doing the math on their way in and out - they’re also doing it for the next guy.
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