Multiple

Raising money eventually means answering the question of what the company is worth. The trouble was that there was little to answer with. A startup running at a loss has no profit to work from, and the projection of what it will earn is something even the people who wrote it treat as half wish.

Early negotiations tended to look the same because of it. A founder would say they were thinking around $15 million, an investor would ask how that figure came about, and the answer would land somewhere near "a similar company got about that much last year." With hearsay as the only support, the other side could neither argue with the number nor agree to it, and the meeting ended by splitting the difference between two figures nobody could defend.

A multiple puts a one-line calculation on that table, one both sides can check. Pick a reference figure, pick a factor to multiply it by, and the arithmetic is done. The factor isn't invented either — it's pulled from what comparable companies actually traded at. So the question this method answers is not what the company is intrinsically worth but what the market is currently paying for companies like it.

Choose a reference figure, pull a factor from comparable companies, adjust that factor for your own situation, and multiply. Four steps.

1. Choose the reference figure. Subscription businesses usually use annual recurring revenue (ARR), the monthly recurring revenue annualized. A company with steady profits might use a profit measure such as EBITDA instead. Loss-making companies still have revenue, so revenue-based figures dominate in startups.
2. Assemble the comparison set. Pull together five to ten companies with a similar business model at a similar stage. Public companies reprice every day, which makes them the easiest source; private deals count only when the terms were disclosed. This step is where the method overlaps with comparable analysis.
3. Derive the factor. Divide each comparable's valuation by its own reference figure. A company valued at $92 million with $11.5 million in ARR gives a factor of 8. Take the median of those results. An average lets one unusually rich deal drag the whole set upward.
4. Adjust and multiply. If your company grows faster and loses fewer customers than the comparison set, the factor moves up; if not, down. The evidence used here is growth rate, churn, and net revenue retention (NRR), which counts expansion from existing customers alongside what they cancel.

A company with $2.3 million in ARR that takes the median factor of 8 lands just above $18 million. Cut the factor to 6 because growth trails the set and it lands near $14 million. Over $4 million turns on a single step of the factor, which is where the weight of the negotiation sits.

It works best when there are enough comparable companies and the reference figure repeats at a similar level month after month. Subscription software is the obvious case. Revenue is locked into contracts and arrives again next month, and several companies with the same model are publicly traded, so there is no mystery about where the factor comes from.

The places it doesn't fit are equally clear. A company still earning almost nothing has no reference figure to multiply. A company with a business model nobody else shares has no comparison set to build. A company where half of revenue is one-time implementation fees is awkward too — multiply money that doesn't repeat and you inflate one good year into several years of value.

There are three limits worth naming.

1. It moves with market sentiment as a whole. Subscription companies that commanded factors near 20 in 2021 were trading closer to 6 by 2023. Nothing about those individual companies got worse in between; what changed was the standard being applied to all of them.
2. The factor is a summary, not a reason. An 8 tells you the market settled on 8. It says nothing about why, and two companies on the same factor can have completely different growth and retention underneath.
3. The reference figure is easy to inflate. Fold one-time fees into ARR and the result rises without touching the factor at all. This is one of the first things due diligence goes after when it examines revenue recognition.

So nobody walks in holding a factor alone. A test like the rule of 40, which checks whether growth rate plus profit margin clears 40, sits beside it as a separate read on whether the company deserves the factor it's asking for.

"Subscription multiples are down to 6 these days. Don't plan against last year's numbers."

The factor the market pays has moved, so the target raise has to move with it.

"At 8 times ARR that's $18 million — you mean pre-money, right?"

Checking whether the figure is before or after the new investment lands.

"That factor comes from companies doubling every year. We're at 40 percent."

Pushing back on a comparison set that doesn't match.

When Pagedeck started preparing its next round, Grace walked in with $2.3 million in ARR multiplied by 10, or $23 million. The investor across the table opened a sheet of seven recent deals in similar companies, where the median factor was 7, which puts the same revenue near $16 million.

Two things accounted for the gap. The seven comparables had grown faster on average than Pagedeck had, and Pagedeck's net revenue retention sat at 118 percent, meaning revenue was rising from existing accounts alone. In the end the negotiation was less about what number to write for the factor than about which of those two facts carried more weight.

The most common belief is that each industry has a settled factor. Articles and newsletters quote a single number — subscription businesses trade at 10 — and it reads like a standard. In practice the same category spans anywhere from 3 to 20. Growth rate, how well customers stick, and company size are what produce the factor. Treat the quoted number as fixed while planning a raise and you can burn six months on a round that was never going to close at that price, arriving back at the table with that much less runway.

Reading the result as the company's real worth is the other frequent mistake. The arithmetic is clean, which makes the output look settled, but it summarizes what the market pays today rather than what the company has earned. A company can operate exactly as before and still be written up at a lower figure next round because the market factor fell. Teams that treated their last round's valuation as a floor are the ones who end up accepting the worst terms when that happens.