Making Sense of Private Tech Company Valuations

Published by Vestbee

Valuing shares in private tech companies is a complicated task. Unlike public firms, where prices change in real-time, private company valuations are inconsistent and often feel more like a matter of guesswork. For employees, founders, and early investors, this uncertainty makes it difficult to determine the true value of their equity.

To help with this, Flashpoint, a tech investment firm managing over $500 million and focusing on tech companies originating from Europe (8 out of 88 investments are into tech companies, established by the founders from Poland) and Israel, created a free online valuation tool. It aims to provide a quick, rough estimate of what one’s shares might be worth in a growing private tech company. By entering a few details about the company and your stake, such as revenues and growth, the type of customer it serves, and the size of your stake, the tool compares the company to a selected set of similar public tech firms and applies appropriate valuation multiples. Updated every three months, the tool offers users a reliable way to evaluate their equity position based on market conditions.

However, valuation involves more than just entering numbers into a tool. The real challenge for tech companies — especially those in early or changing stages — is predicting future cash flows. Traditional valuation methods depend on forecasting these earnings, but this is often unrealistic for companies that are still working on their business models.

Many professionals, including 93% of equity analysts, use a comparable approach, relying on revenue or gross profit multiples from similar companies. Yet this method has its drawbacks. Small changes in assumptions — like growth rates or customer retention—can significantly alter the result.

Several factors influence how private tech companies are valued:

• Revenue Quality: Recurring subscription revenue (e.g., SaaS) is generally more valuable than transactional revenue from marketplaces.
• Customer Type: B2B companies usually have more stable revenue and higher average deal sizes than B2C firms, though they experience longer sales cycles.
• Growth vs. Profitability: Growth creates value only if the return on invested capital exceeds the cost of that capital. Tools like the "Rule of 40" (growth rate plus free cash flow margin) help manage this balance.
• Unit Economics: Metrics such as customer lifetime value versus acquisition cost are essential for understanding how efficiently a company generates profit.
• Business Risk: Competitive pressures, market size, and product defensibility influence long-term earning potential.
• Funding Risk: A company’s burn rate and runway determine how soon and on what terms it needs to raise capital again.
• Capital Structure: Complex cap tables, liquidation preferences, and investor rights can significantly impact the worth of a shareholder’s stake.
• Discounts: Illiquidity and minority stake discounts — often reaching 30% — are common when estimating private share value.

While such tools provide a straightforward way to gain initial insights, they cannot replace thorough analysis or professional valuation. Still, it gives shareholders more transparency — something essential for equity-focused employees and long-term investors.

Ultimately, knowing the value of your shares is about more than just numbers; it means grasping the business fundamentals behind them.