"Paranoia starts deep,
Into your life it will creep,
It starts when you're always afraid,
Step out of line and the man come and take you away." - Buffalo Springfield, For What It's Worth

I'm not sure you noticed, but there have been some significant changes in the value of the company you are working for in the last, say, year or so.  To say that this change has caused some people to be upset is an understatement.  I have witnessed founders and CEOs become apoplectic when delivered a view of thier company's current value.  Around Western Canada, indeed around the world, there are Boards meeting right now confirming what seems to be a commonly accepted truth: Don't worry about valuation today. Wait until next year.  Valuations are going to come back.

Back to what?

Perhaps it was the last downturn that has those of us in technology markets thinking that the good times will return.  We went through a massive correction in 2000 and 2001 and then saw things return to "normal" by the end of 2003 with Google's IPO and a solid bull run in the markets to the end of 2007.  We expect it to happen again.  I hear it everywhere.  "SaaS companies should trade at 4x revenue", "Facebook is getting valued at 20-30x its number of registered users","There is a premium for clean technology companies".  I'm here to tell you that it might not return to the 2007 world of valuation again in 2010.  It might not come back to that world for a long, long time.  So stop fantasizing about how much your company will be worth, when "normal" returns... there is a new normal.

Here's an anecdote that is instructive on current valuation.  EBay bought StumbleUpon for $75M in May 2007.  StumbleUpon grew for 24 months, reportedly to $15M in revenue from under $10M.  EBay just sold it for $29M back to VC investors in April 2009.  The company grew revenue and sold for less than half two years later.  Ask anyone currently raising money in this market... if they are compelling enough to get investors to consider parting with their money, what is the valuation?  Down. Low.

Ever since the Netscape IPO in 1995, we have been subjected to some great valuation fantasies based on every metric that a bored investment analyst could come up with... except for those based on cash flow.  Multiples of revenue are ingrained in the heads of technology investors and entrepreneurs.  Multiples of registered users, web site traffic and employees (yes, dollars per head of software developers) have all been used as comparative measures that somehow became relative measures of your company's worth. 

Ultimately, any company that is looking to own you and your business and therefore any shareholder who wants a piece of your business, will look at how much cash you are making and will make in the future.  Your worth is not a multiple of sales, it is a multiple of how much of that revenue you turn into cash.  Yes, strategic deals happen all the time, where acquired companies are assigned a value based on a technology fit/need and not any available metric.  But the acquirer will have a model that shows how this expenditure by their company turns into much more cash down the road. 

So what is the new normal for valuations?  Well, all I can tell is it's not 2007 levels.  You would do well just to forget comparing to the past. A cautious new world will take many years to get frothy again. Good private businesses may fetch 4-5x cash flow in the new normal. Forget 10x. The aforementioned eBay is at 6.7x today. IAC, which owns dozens of Internet media properties is valued at 8x.

The value for your company is unique.  Comparatives are useful to ballpark where you are, but the real value will be found only by exploring the market for buyers and having them tell you what you are worth. As always, a rapid growth story will be valued much higher than slow growth. And a disruptive new technology will fetch big premiums if the market believes it is the next big thing.  For most of you, it will come down to cash flow.  How consistent?  How much? And how big will it get?

It is up to investment bankers like me and entrepreneurs like you to "sell the dream" and get the best value possible for your company. But please do not look in the rear-view mirror for any indication of what you should be worth.  Those days are gone... let them go.