How we determine valuations for marketplaces
By boris, July 20, 2015
I often get asked about how to determine the valuation for a marketplace startup that is starting to scale. So I’ll run through some basic math for how we value marketplaces at version one.
The main multiple we like to use for marketplace businesses is GMV (Gross Merchandise Volume…the total volume of goods sold on the marketplace). Our rule of thumb is that marketplaces at scale are valued at roughly 1x annualized GMV (typically about 6-8x annual revenue). These are for marketplaces that are growing fast and are category leaders.
Our assumptions for this valuation:
- Scale: > $1b GMV
- YoY growth of at least 30%
- Take rate of about 10-15%
Taking Etsy as an example…
- Consensus estimate of approximately $270M for 2015 revenue
- $2.4B for 2015 GMV
- Take rate of about 11%
- YoY growth for most recent quarter (ending Q1 2015): 45%
Etsy had a market cap of about $2.22B as of July 20, with a revenue multiple of 8.2 and a GMV multiple of 0.92 (but note that its GMV multiple was as high as 1.7 immediately following its IPO).
Bessemer offers a good overview of current valuations for different business models: SaaS, marketplaces, consumer, and ecommerce. You can see in their chart below that marketplaces get some of the highest revenue multiples because of their operational leverage and high defensibility at scale.
So what about early-stage marketplaces?
These calculations apply to marketplaces that have already solved the chicken-and-egg problem, reached liquidity, and have become a category leader. But you might be wondering how to value your early-stage marketplace startup.
Early-stage companies are valued very differently. In this case, metrics don’t count – we’re evaluating the team, idea, and vision. Then as the marketplace starts to scale fast, the multiples are often very high because growth is high as well. But you need to understand that your marketplace will ultimately be valued at 1x GMV. If you’re a founder of an early-stage marketplace, you should put your focus on two things:
- Growing GMV
- Proving out take-rate
Sometimes we see entrepreneurs who pitch impressive GMV numbers, but haven’t proven out that they can ultimately get to a significant take rate. For example, a marketplace that generates leads instead of being part of the transaction might have a take rate as low as 2-3%. In this case, the GMV needs to be 5x bigger than a comparable marketplace with a 10-15% take rate.
The bottom line? Don’t wait too long to prove out your monetization.
(Thanks to Mark MacLeod for giving me the idea for this blog post.)