The Total Addressable Market, which is represented in short as TAM, gives an indicator of the possible size of the tech company in the future. You must look at the potential company’s size in the future if you want to invest in a tech startup. Check up for bottom-up sizing instead of top-down sizing. This is a way to get the measurable and realistic size indication of the startup more in the future. A clearer and quantifiable description of the startup in the future will offer you a fair value of what the business will generate when everything goes well as planned.
When the total addressable market has been identified together with the potential company’s size in the future, you are closer to knowing the value of the tech business.
While it is advisable to look for similar companies to know the value of your tech startup, don’t overlook other companies with the same model but in different sectors. The main thing is that the comparable companies have similar business models to the tech company you want to find the value or build.
Suppose you’re developing or are already in a tech company that offers software services. In that case, you can look for comparable companies such as Dropbox, Open Table, Box, SalesForce, and the rest. You should also check out data linked to EBITDA, valuation, and sales. Also, check for enterprise value and market capitalization data if you are looking at private or public companies.
Businesses in their early stage are loss-making. Thus, using sales as a proxy is advisable though the value tech companies get from using it is not fair enough to the value derived from EBITDA. In other words, EBITDA is a better and closer proxy to the inherent worth and cash flows.
Next, you should find the average of the comparable companies’ EV/Sales or Price/Sales and EV/EBITDA ratios. A discount rate to market risk, liquidity risk, and other market factors should be attached. You will arrive at your multiple at this point, which helps significantly in assessing the valuation.