How to Achieve the Highest Valuation for your Tech Company – LinkedIn Article
Apply Different Valuation Methods to Different Sectors and Stages of Growth
Sector Dynamics
Valuation is very sector dependent. In the artificial intelligence sector, Anthropic is raising $2 billion in a new funding with a valuation at 66x forward revenue (1/8/25 The Information – Anthropic Makes OpenAI Look Cheap, Again). In the CRM sector, Salesforce trades at 8x revenue. How is such a major difference – 66x revenue vs. 8x revenue – in valuation possible?
For hot sectors, valuation depends on the location on the Gartner hype cycle, the peak of inflated expectations or the trough of disillusionment. Artificial intelligence is a good example, since it is still a hot sector. Investors do not use traditional revenue multiples for hot sectors but work backward from the expected exit valuation. If a company is expected to be very valuable on a probability-weighted outcomes basis on exit, the investor can afford to pay a higher entry valuation which may look sky high at the time (Andreesen Horowitz – When Entry Multiples Don’t Matter).
The key word here is “probability” since many artificial intelligence companies will fail. The artificial intelligence sector is getting crowded, with Y Combinator alone funding 32 AI Legal startups (Legal Startups funded by Y Combinator 2025). But for the AI companies that survive, early investors can achieve extraordinary returns. In the dot-com boom, for example, Jeff Bezos invested $250,000 in 1998 in Google and his stake was worth $280 million at Google’s IPO in 2004, a return on investment of 111,900%.
Many companies in hot sectors miss the peak of inflated expectations to sell and try to generate more revenue, believing they will be valued on a traditional revenue multiple. If they miss the peak, they must sell in the trough of disillusionment or wait many years for the plateau of productivity, but this carries operational, financial, and competitive risks. Nvidia stock price is down recently, which may be an opportunity to buy the dip, or a longer term move for Nvidia and other AI companies down to the trough of disillusionment.
Less than $10 Million in Revenue
For a tech company with less than $10 million in revenue, the acquirer will not value the company at a revenue multiple on a stand-alone basis. The acquirer will do its own internal build or buy analysis to determine how unique the product is and the urgency of bringing the product to market.
The acquirer will conduct technical due diligence with the engineering teams on both sides. If the engineers give a green light, then the corporate development team will create an internal valuation model to estimate sales of the product through their global distribution channels and value the company based on this internal valuation model.
The acquirer will examine a “Return on Investment” or ROI calculation which refers to the percentage return a company expects to gain from acquiring another company. If the acquirer is a public company and its stock price increases on the deal announcement, then the market is anticipating a positive ROI from the acquisition.
Tech companies often make the mistake of waiting until they achieve a revenue number, e.g., $10 million, before they start an M&A process. By the time they reach the arbitrary number of $10 million, they miss the window of opportunity to sell since their product is no longer unique, and the potential acquirers have already built a competing product or acquired their competitors. At below $10 million, evidence of product market fit is important, but not substantial revenue.
It is often the case that a company will receive a higher valuation at less than $10 million in revenue than with more than $10 million in revenue since the acquirer’s internal valuation model will be more optimistic for early-stage companies. Also, early-stage companies typically experience rapid growth which is not captured in the traditional revenue multiple valuation so a higher valuation is justified.
More than $10 Million in Revenue
Once a company reaches over $10 million in revenue, then traditional revenue multiples are applied. A company needs to be compared specifically to other companies in its sector. It is important to drill down even further to the subsector, for example in the FinTech sector, a payment company will be valued higher than a neobank, a digital only bank, since a payment company is easier to scale and has a lower regulatory burden.
Revenue synergies are especially important to increase the valuation, and it is useful for the seller to point out their view on revenue synergies to the acquirer, since the more revenue synergies in the acquirer’s internal valuation model, the higher the acquirer’s valuation. A detailed valuation will include key drivers such as growth rate and total addressable market size. For SaaS companies churn rate, customer lifetime value (CLV), customer acquisition costs (CAC) and the LTV / CAC ratio are critical. Using forward revenue multiples and not the latest twelve months revenue figure will increase the valuation. A realistic earnout can also be used to increase the valuation.
More than $100 Million in Revenue
For a tech company with more than $100 million in revenue, both revenue and cost synergies are important. An acquirer will also examine EBITDA multiples if comparable public companies trade on EBITDA multiples. The discounted cash flow method is also used since the DCF method becomes more relevant for larger tech companies with predictable cash flows.
In large cross-border deals, e.g., an Indian public company acquiring a U.S. company, market expansion is often the driving force in a deal. Currently Indian companies have healthy balance sheets and seek a foothold in the U.S. given its robust economy. The acquirer also will calculate the cross-selling opportunities in the U.S.
Conclusion
The seller can obtain a higher valuation if it understands the strategic motivations of the acquirer, i.e., ROI, revenue and cost synergies and market expansion. For traditional tech companies understanding the value drivers in different sectors and subsectors and different growth stages will result in a higher valuation. Detailed analysis is required to justify the highest valuation possible. For companies in the hype cycle or below $10 million in revenue, it is important not to miss the window of opportunity to sell for more than the traditional valuation.