Market Multiples Impact on Startup Valuations

We often hear that fund managers look for exit opportunities when valuations are high to maximize sale value. Similarly, you may have also heard that the best time to make new investments is when market multiples are at lows since this will minimize your investment cost.

Whether you are a startup founder heading into a funding round, a private equity investor looking at investment opportunities, or someone trying to understand startup valuation trends, understanding the impact of market multiples is key.

Hence, in this article, we will discuss what market valuations are and how they impact startup valuations.

What are market valuation multiples?

Market multiples are calculated to understand how the stock market is valuing companies based on their actual financial performance. We can calculate this by dividing the total market capitalization of all companies in a market by the total of a key financial figure reported by all companies.

Some common types of market valuation multiples are as follows:

• EV/EBITDA – The enterprise value to EBITDA (earnings before interest, tax, depreciation, and amortization) ratio is used to understand how efficiently companies utilize their funds to generate earnings.
• P/E ratio – The price-to-earnings (P/E) ratio indicates how investors value a market based on the earnings generated by its companies.
• P/B ratio – The price-to-book value (P/B) ratio indicates how investors value a market based on its net assets.
• P/S ratio – Like the P/E ratio, the price-to-sales (P/B) ratio indicates how investors value a market based on the sales earned by its companies.
• P/EG ratio – The price-to-earnings growth (P/EG) ratio indicates how investors value a market as a whole in relation to its companies’ earnings growth.

When we know the market multiples, we can calculate similar valuation multiples for individual companies to understand if they are being fairly valued, undervalued, or overvalued in the current conditions.

The concept can be extended to private equity, provided you have the ability to research financial figures and valuations of private concerns.

How do market multiples impact startup valuations?

Since market multiples are used directly to value startups and are an indication of investor sentiments, they can impact a startup’s valuation directly as well as indirectly. Let us explore these ideas in a little more detail.

Direct impact

Business valuation methodologies can be categorized into the three approaches which are market-based, asset-based, and income-based. In the market-based approach, we value companies by establishing a market multiple based on the valuations and financial performance of other similar companies.

So, if it is skewed due to over-optimism or pessimism, we are unlikely to get accurate valuations from the market-based approach.

Let us understand this with an example.

Suppose Larsson Datamatrix is a web analytics company whose annual sales in 2024 were $40 million. Now, we will apply the calculation methods discussed earlier based on the following data collected when the market was neutral, neither optimistic nor pessimistic.

Company	Annual sales (in millions)	Market Capitalization (in millions)
DataPulse Analytics	$50	$1,050
WebInsight Pro	$49	$1,470
Digital Metrics Lab	$36	$936
BlueTrack Analytics	$33	$726
SiteGauge	$50	$1,200
ClickStream Solutions	$42	$1,134
TrafficViz	$50	$1,050
Nexus Metrics	$50	$1,050
CoreView Analytics	$36	$1,080
PageFlow Insights	$46	$920
HyperStat Analytics	$33	$858
PeakTraffic Metrics	$30	$540
OptiTrack	$47	$705
EngageIQ	$44	$836
WebVista Analytics	$30	$870
DataScout	$43	$1,075
TrendLens	$38	$1,140
SiteFusion Analytics	$43	$946
PixelTrack	$38	$1,026
MetricEdge	$41	$1,189
Total	$829	$19,801

Market multiple = Total valuation or market capitalization ÷ Total annual sales
= $19,801 million ÷ $829 million
= 23.89

Therefore, Larsson Datamatrix’s valuation = Market multiple × Annual sales
= 23.89 × $40 million
= $955.42 million

From this exercise, we know that the market would value a company like Larsson Datamatrix at $955 million under normal conditions.

Now, let us calculate the Larsson Datamatrix’s valuation if the market was optimistic or pessimistic.

Company	Annual sales (in millions)	Market Capitalization
		Pessimistic market (in millions)	Optimistic market (in millions)
DataPulse Analytics	$50	$900	$1,750
WebInsight Pro	$49	$931	$1,666
Digital Metrics Lab	$36	$684	$1,152
BlueTrack Analytics	$33	$495	$1,056
SiteGauge	$50	$850	$1,750
ClickStream Solutions	$42	$756	$1,428
TrafficViz	$50	$850	$1,650
Nexus Metrics	$50	$1,000	$1,750
CoreView Analytics	$36	$540	$1,152
PageFlow Insights	$46	$782	$1,610
HyperStat Analytics	$33	$594	$990
PeakTraffic Metrics	$30	$480	$960
OptiTrack	$47	$752	$1,551
EngageIQ	$44	$704	$1,452
WebVista Analytics	$30	$600	$1,050
DataScout	$43	$688	$1,505
TrendLens	$38	$722	$1,216
SiteFusion Analytics	$43	$645	$1,376
PixelTrack	$38	$608	$1,330
MetricEdge	$41	$738	$1,435
Total	$829	$14,319	$27,829

Now, let us use the earlier formula to create a table of market multiples covering all three types of markets. While we are at it, let us also calculate Larsson Datamatrix’s valuation in all three cases.

Market	Total annual sales (in millions)	Total valuation/market capitalization (in millions)	Market multiple	Larsson Datamatrix’s valuation (in millions)
Optimistic	$829	$27,829	33.57	$1,342.77
Neutral	$829	$19,801	23.89	$955.42
Pessimistic	$829	$14,319	17.27	$690.90

Thus, we see that investor sentiment can cause Larsson Datamatrix’s valuation to fluctuate, potentially driving it 27.69% lower or 40.54% higher than its value in unbiased markets.

Indirect impact

Market multiples are an indication of how optimistic the investors are about the particular segment at a given point in time. If the EV/EBITDA multiple for the market is much higher than its long-term average, we can say that it is over optimistic. We can say the same thing when a sector’s EV/EBITDA is much higher than the market-wide EV/EBITDA.

When investors are over-optimistic, they will make irrational assumptions about a company’s growth potential and the market-wide risks.

For instance, as of January 2025, the market-wide EV/EBITDA in the US was 22.86. In contrast, EV/EBITDA for internet software companies such as Shopify, Cloudflare, GoDaddy, and VeriSign was 97.97. This means that if the internet software companies are expected to last 10 years, they must achieve an annual EBITDA growth of 40.04% to justify these market multiples.

Please note that this would be the overall growth expected of the entire sector and not from just the top performers.

In such a scenario, the investors would be making incorrect assumptions such as:

• Unrealistic growth rates – The expected annual growth rate of 40.04% is almost double the 10-year annualized return of S&P 500 Information Technology (20.17%). You must note that, in this period, S&P 500 Information Technology not only outperformed the broad market index (S&P 500) but also the sectoral indices, the next best performer among which was S&P 500 Consumer Discretionary with 10-year annualized returns of 11.32%.
• Ignoring the impact of macroeconomic conditions – The amount of EBITDA growth expected by investors cannot be achieved without sustained consumption expenditure and economic growth. Otherwise, the appetite for internet software products would decline. However, economic growth goes through cycles of booms and recessions. We rarely see an economy continuously grow at a high rate in the long term.
• Overestimation – Continuous and segment-wide EBITDA growth of 40.04% is impossible without substantial growth in the internet software size. However, the global market for software products is expected to grow only at a compounded annual growth rate (CAGR) of 11.3% until 2029.

Eqvista – Precise valuations for agile decision-making!

Market multiples serve as a yardstick for measuring how fairly a startup is being valued compared to other companies while helping us understand if the market itself is valuing assets fairly. This can help us time our entries and exits while also helping us find arbitrage opportunities.

In the context of private equity, calculating market multiples requires extensive and dedicated research. Whether you’re looking to invest in high-potential startups or trying to exit at the right moment, Eqvista’s valuation services can provide data-driven insights that would help you make informed decisions. Contact us to learn more about our valuation services!