10x rev valuation is for high margin saas growing at 3x y/y in a massive TAM where incremental capital injection results in predictable rev growth

10x ebit is not 10x rev - I think hardware startups that can demonstrate economies of scale and straight line growth on advertising + additional product segments and markets are catching very healthy valuations still - not saas levels but large saas companies are pushing way more than 15x ebit.

Do you mean EBITDA?

aka Earnings before interest, taxes, depreciation and amortization

Advertise features you don't have and disappoint/infuriate those would-be users? Or are you suggesting a slightly less annoying 'coming soon' type landing page, where if it doesn't get enough traffic 'soon' just never comes?

Wonder about this myself, have noticed with folks like Rob Walling and presumably others. They all seem to suggest testing market fit by essentially doing this for features, and in some cases soft launching websites prior to having anything ready at all!

Seems risky if you are dipping your toes into something you do not have a deep understanding of the product market for.

Anecdotally I've seen with video games (the communities tends to be very vocal and somewhat centralized?), where inexperienced developers promise things that are realistically way beyond the capabilities, or promise things too early based on their honeymoon period for rough implementations. Then suffer on the other end when they fail to meet roadmaps or delivery of features at all.

It seems like an even worse situation with serious software with asks for larger amounts of money? Then again maybe this strategy can get away with it, because there is that lack of cohesive communities with some degree of group think who would get up in arms over bad promises?

The reason it won't really work for gamedev or complex software is that the risk of the business isn't really in the product-market fit, but rather in stellar execution.

If your business idea is dependent on being able to do a complicated thing, then a POC or a demo might make more sense for testing the waters and seeing if there's any technical impediment to the idea

on $10/day max spend you'll get 1-2 people that will visit the page, and you can put a "coming soon, leave an email and we'll let you know" then you can email them when it is deployed as well to recoup the adspend. If they're looking for a feature you don't have they're not really your customer today anyway. If they're looking for a feature that doesn't exist anywhere then they have no choice but to wait for it to be built.

Yeah, it’s simply lying.

“Hussle” ethics of “if it works it’s OK” are so damn gross.

Sure, but the valuation doesn't buy you any food. In the end you need cashflow.

depends on what "in the end" means haha

it means when the bills come in and are due

> …but the reality is you're creating a company that should be valued (and eventually sell) for 7-15X Earnings - and you really should be looking at that increase in value vs your increase in profits.

Muslim here. I think this is completely immoral and I don’t want to ever participate in stock market if/when I found a company. I want my business to be valued with the actual value it provides to people (the amount they are willing to pay me for my products), not the hypothetical future money it may potentially provide to rich people who gamble with their money and the economy.

The reality, and this is how a private party, PE firm, traditional bank or public market will determine this:

The company is generating profits currently at this rate Y, and is growing at this rate X, that means that over 3 years it should return those profits + the growth of that profit back to the buyer (in cash as dividends and/or in enterprise value), and that is factored into a rate of return - if that rate is greater than the rates elsewhere, compared to the risk, then it makes sense to buy it at that value.

Consider comparing the business to a traditional investment. How much money would you need to have invested in medium-risk markets to return $236k/yr? To beat the market average you'd need about $2M invested to generate those returns. Now factor in that the company itself is growing, and the company will likely generate >$236k next year, and more the following year... so how much do you need to invest today in traditional markets to generate 236k+360k+500k (1.09M) over the next 3 years? It's around $3M now. Consider that in 3 years time you could have taken $1.09M out in profit, and you now own a business that is worth $4-4.5M (based on future earnings potential).

You don't need to be an evil wallstreet hedge fund manager to think like this - the owner of a business should consider the enterprise value of their business at all times in making decisions about their business.

This is how the entire economy works - if you're saying that is against your moral Muslim faith then you should not be buying any goods right now from public companies, hold any mortgages, or keep any money in a bank.

What's the difference when the 'product' is the company itself? When a buyer comes along offering 7-15x the company's earnings for it, why is that not 'the actual value it provides' them?

Company acquisition is possible without the existence of a stock market. What I’m objecting to is the latter.

IPO/stock market was not mentioned anywhere in the post. It’s much more typical to be acquired than to go public.

Sorry, you’re right. Confused the two for a second.

You're the only one that mentioned the stock market at all, so I would question if you know the difference you're alluding to here.

As others pointed out, nobody else mentioned sale by public offering.

But let's go with it anyway, why is that different? It's just a way to have multiple owners, more easily very many of them than you could manage in a private sale. So why is the stock price not the actual value people see that slice of the company as providing them?

> immoral and I don’t want to ever participate in stock market

I feel that is a common opinion amongst people that haven't started a business. It is too easy to judge others.

If you are selling a product/service you can't avoid becoming part of the capitalist system and you are supporting "immoral" companies through your suppliers (e.g. paying Google for advertising, paying Amazon for fulfilment).

It is difficult to start a business and keep true to your ideals. And people that do walk the line between creating a business and keeping their morals is uncommon enough that they tend to be remembered for it e.g. Bob's Red Mill: https://news.ycombinator.com/item?id=39366542

It is much easier to be tritely moralistic if you don't start a business. I often really admire people with idealistic values - and morality is critical in business. I don't admire people if they go to negative extremes: https://en.m.wikipedia.org/wiki/Splitting_(psychology)

Almost by definition starting a business means taking on risks. Mixing risks and money is "gambling" and it is an inherent property of businesses. Deciding what is good gambling and what is bad gambling is a very old problem. Buying insurance is reducing risk (less gambling) but insurance is gambling by definition. Unfortunately you have chosen the moralistic word "gambling" to talk about the normal issue of managing risk.

Perhaps you just don't like the rich? One can have shares and own a business without being/becoming rich - you don't need to directly involve wealthy people.

One can bootstrap a company without taking rich-peoples investments - see article. Unfortunately we get hoodwinked by the success stories from the VC investment sector. We hear less about the losers in the VC game or other ways to play the game of business.

Edit: a business is just a complicated machine. If you believe selling a product is moral, then you must believe that selling a business is also moral.

As a Muslim, I disagree. A business is more than the sum of its revenues. Marketing, research and development, relationship with clients, etc. are all part of the business valuation. If a buyer looks at some business and decides its worth 10x, then that's not haram as long as you're not deceiving them.

Uh? Islam says nothing about the stock market. Participating in businesses and having shares is completely halal, and encouraged actually. That's the good way of generating long term revenue, as opposed to lending or profiting from interests. The very first Muslims and the prophet himself PBUH were merchants and traders, and business owners.

I’ve met people that believe that any extension of credit that has a premium attached to it is against the rules. And that the very real fact that any transaction on a modern exchange involves the extension of credit with a premium, leads to a situation where the exchanges themselves are forbidden.

I don’t have any opinion on if this interpretation squares with their religion but it is certainly true that stock exchanges are run on extending credit and paying a premium for it.

Mhmm I can see that argument being quite valid for trading stocks in general. As in, a actively trading since it inherently involves margin and leverage at one point or another, but just owning a share of a publicly owned corporation is a bit different imo.

As you said it depends on interpretation, and I think it depends but it's not as clear cut as the comment I was replying to could make it seem for others.

Why should a company be assumed to be eventually sold? What the heck is that kind of perspective. The vast majority of small/medium companies are not sold - instead they provide regular income to their owners.

This sounds to me like typical toxic silicon valley startup mindset.

> The vast majority of small/medium companies are not sold - instead they provide regular income to their owners.

This is true. Most people don't want to buy and run a restaurant, bodega, hardware store, etc.

SaaS companies, on the other hand, are much more attractive to buy. They can be run remotely, often do not require many employees, and can be managed by a team that manages other companies simultaneously.

The author's company falls into a middle ground. Hardware manufacturing has certain idiosyncrasies that make it less turnkey than SaaS. But nonetheless, many of the functions (shipping out units) can be carried out by staff who are trained but not necessarily highly technical. And it sounds like the advertising has been pretty dialed in and automated (though would need to be tweaked in future years, undoubtedly).

There are some types of businesses that are hard to sell. Law firms, for example, can only be owned by lawyers! But companies like this one (and SaaS companies run by many HNers) are much more attractive for buyers.

But even if it's not ever sold, the notion of valuation is still useful because it quantifies the value of the future cash flows and the anticipated time-cost of running the business.

Eventually, the owners are gonna want to retire or they will die. Maybe, the business can be inherited or passed on to family, or an employee. But if your family doesn't want to take it over and you don't have any employees who are able to run it (if it is profitable enough you could consider hiring a manager), you either sell or shut down. Generally, most find it preferential to sell. And most who have spent their life working on something would prefer to sell and use the income to fund their retirement- and see the business continue.

There are lots of different exit strategies, but oftentimes a sell of some sort is the only one that really makes sense.

You don't need to sell it - you can lend against it or sell part of it.

I don't think it's a toxic mindset but a financially literate mindset.

Your question can be rephrased as why should a company be valuated?

Do you not see a point in valuating a company?

Because if you do see a point, how else will you do it without assessing how much someone else would be willing to pay to acquire it, i.e. how much would it sell for?

In real estate there's this idea that if you plan on dying in your home then the value of it is unimportant.

That idea also applies here.

Unless you have a mortgage, or your city reassesses property taxes, or...

gais, taxes exist, therefore the idea of not worrying about the sale value of your property doesn't apply!

So the entire point of a "valuation" is to determine the sale price, right?

Sale price is just one possible valuation. Replacement cost is another. Net present value is yet another.

The vast majority of small/medium companies aren't saleable either. However, building them to be sold, even if you have no intention of selling, makes them more valuable.

> This sounds to me like typical toxic silicon valley startup mindset.

I think this is naive cynicism, as it were. Lots of companies are started by people who eventually want to sell them, be it after 5 years or 50. Being biased against Silicon Valley won't give you a good handle on this stuff.

Further to this, even if you don't intend to sell the company, it's only really worth something besides the salary or dividends you draw for yourself if it is generally in a condition where it could potentially sell.

If it's legally dodgy; if accounting is a total mess; if it relies entirely on personal connections or favors; if tax returns or licensing are a mess; if there is no documentation; if there is no consideration for bus encounters; etc; etc - then it would take major work before it could be sold and it is worth little until that work is done. (Besides the current payouts to the owner which only exist as long as the owner works on it.) That's because if the owner quits or is incapacitated, the company just about doesn't exist anymore.

Not true at all. The local corner store, laundromat, and plumbing company are usually not something that can be sold easily. If they do, it takes years to find a buyer and they are getting a low sale price.

Tech startups had high multipliers in the past 10 years thanks to dumb money, low interest rates, and lot of hope. Most of those things are drying up and many tech startups that had decent valuations are now worthless.

> If they do, it takes years to find a buyer and they are getting a low sale price.

Is this true of standard businesses like laundromat or plumbing?

Or is it a matter of such businesses rarely being in a condition that makes a sale easy? If these are in a good condition accounting-wise for example, they should integrate readily and for a basic multiple of sales into one of the neighbors?

What I have seen is unrealistic prices - and that's another matter.

Ferrero, Mars, Ikea, Ikea and Valve prove that you can get very big and stay private.

Not everyone wants to IPO, or sell to big player.

You may want it to stay in the family, or protect the original culture. Maybe you found someone in your team that will be a great CEO.

Maybe you like that life.

You don't even need to big huge, look at 37 signal.

Yes, of course there are different options. I'm not saying there's only one option. I'm saying there are more possibilities, not fewer. I.e. selling isn't some weird, Silicon Valley mindset.

then do the calculations in 5 or 50 years.

I don't understand your mindset that says you should decide when other people multiply some numbers.

I don't understand how anyone misread that so badly while genuinely attempting to respond.

I suppose we can both say there are things we don't understand.

> I don't understand how anyone misread that so badly while genuinely attempting to respond.

Probably because when given a chance, you don't take the chance to explain yourself better, and just do a junior high Uno reverse card response.

You're missing something. From the post:

> I don’t draw a salary, so the total amount I earned from TinyPilot in 2023 was $236k.

and

> Result: I worked 35-40 hours per week, a reduction from previous years, and traveled more than any previous year.

This is a person who is effectively full-time CEO of this business and whose market salary is likely at least $236k. If they sold the business, the new owners would have to pay someone else to put in those 35 hours.

Maybe the new owner could employ a less-skilled manager and pay them less, or maybe there's still lots of potential growth or room to cut costs, but that's all quite speculative: right now the business has a profit, and therefore a valuation, closer to zero.

> right now the business has a profit, and therefore a valuation, closer to zero

You’re thinking of this like an engineer rather than a business person.

1. When selling a business like this, the $236k would be called SDI or SDE (seller discretionary income/earnings).

2. The buyer determines what, if any, of that SDE will need to go to paying someone to do what the seller does. These duties could be assumed by the buyer, they could be assumed by existing people the buyer employees, the tasks could be reduced or eliminated, etc.

3. Based on 2, the buyer will typically adjust the earnings multiple that they are willing to buy at.

4. For complex businesses that need someone doing one or more specific roles, the listing agency for the business, if good, will encourage the seller to fill certain roles to improve the overall salability of the business and multiple of earnings that it will be sold at.

5. Without really looking into the business, I’m almost certain that it can be sold for much closer to $1m (or more!) than to your suggestion of (edit) closer to $0.

GP does not suggest a valuation of zero. GP says that the profit and valuation is closer to zero. It is not crystal clear if this means "closer to zero than it is to $236k" or "closer to zero than $236k is" (i.e., less than $236k). The second is undoubtedly true.

The first may also be true, but would depend on the cost at which the labor can be outsourced reliably, and what oversight would need to be done of these outsourced activities.

Fair enough. I changed my comment to “closer to $0”.

I still think that even talking about or towards $0 is bizarre. Saying something like “less than $236k” would have been much more meaningful if op meant either thing you said.

The other poster is right, if you told someone who knows about business valuations about this conversation they'd be confused and bemused.

Easiest place to start is valuations arent capped at one year of profit, or last years profit...the silly mistake is the one year thing, the more advanced mistake is looking at profit instead of cash flow.

He's thinking about it like a business person who is looking at buying a business. It's worth close to zero. In it's current state this business is not an asset, it's a organization doing stuff.

Breaking it out into SDE + adjustment is what the comment already does, albeit without using that terminology.

One cannot hire a person who can do all the things this owner does. The person is a smart former google engineer. These people don't grow on trees. It would take a few people to do a bad approximation of what he does. The adjustment to SDE is going to be 100's of k and you get to 0 cash thrown off.

> It's worth close to zero.

Serious question… have you bought a business before?

It’s what I do.

This business is not worth close to zero, and the stuff that the current owner does (even if he’s some miracle worker, which xooglers aren’t guaranteed to be) can be handled any number of ways that cost less than $236k by some buyer. This may not mean you or the person that I replied to, but you two most likely aren’t a part (and certainly not a significant part) of the market of buyers for businesses like this.

I can’t tell if you’re circle jerking the owner, xooglers, or the (limiting) engineering way of thinking about businesses.

Yes. Lots of them.

Who is the buyer? The logical buyer of this hardware business doing $1m per year and can backfill all the things this guy does at some low enough number that this business generates cash. And then, enough cash that it's worthwhile to go through diligence and paper up a deal and take on the risk that there isn't skeletons in the closet.

> Who is the buyer?

Realistically, the best buyer would be someone who has deep connections in a market that the current owner hasn’t penetrated that could 5x the volume almost instantly.

They would hem and haw about whatever small multiple the seller is asking for, and then laugh all the way to the bank after close.

I’ve seen this happen many, many times.

> And then, enough cash that it's worthwhile to go through diligence and paper up a deal and take on the risk that there isn't skeletons in the closet

For a business of this relatively small size, an agency would likely be used, and they would do all of this scutwork, and their fee is paid by the seller. Which agency or agencies have you used (if any)?

> Realistically, the best buyer would be someone who has deep connections in a market that the current owner hasn’t penetrated that could 5x the volume almost instantly.

This is a nice theory. And it could be true, and it does happen, but it's more than likely not.

You must be using better M&A brokerages/bankers than I ever have. None of them do actual diligence, they are selling the business...They are actively making the business look different to what it is. They certainly don't take on any risk (they are not a party to the agreement in any way) and they certainly don't obviate the need to use and pay a lawyer (and most small deals are each person pays their own costs).

With respect, are you actually buying businesses? Or just doing contracted technical DD? It feels like you are missing a good chunk of the picture here. The default take on the value of this business by a lot of folks buying businesses is going to be "close to zero". I mean, to be fair, I have not ever bought a hardware business so I'm a little out of my depth here... but.. not miles out.

> This is a nice theory. It could be true, it's likely not.

I’ve done it / do it with taking products and services to certain East Asian markets. And sometimes scaled quickly at much more than 5x of the original revenue.

> You must be using better M&A brokerages/bankers than I ever have.

FEI is one such broker, and know people on both sides of transactions done through them that are happy. I haven’t used them personally, but that’s one example.

They definitely do due diligence.

> With respect, are you actually buying businesses? Or just doing contracted technical DD? It feels like you are missing a good chunk of the picture here.

Funny, I was about to ask/say the same thing.

Yes, I buy businesses. No, I don’t do technical DD contract or otherwise (frankly, I’m not tech savvy enough to do that on my own — I can sniff out some bad code, but I let the pros do what they do).

I/we are on HN reply delay to prevent “flame wars”, even though I don’t think we are flaming. As such, I will stop here.

If you are what you actually say you are, I wish you luck and all the success in the world. That said, I stand by everything I have said above.

I did almost say ~ "it's possible we just see very different deals and it colors the perspective".

I never deal with asia. Maybe everything I'm saying is off base given it's hardware and asia is a thing in that realm.

I'd just like to say that I very much appreciated reading both of your responses, and commend you both for firmly but politely and reasonably disagreeing.

Second that. Good to see a polite but firm discussion in the comments. Also very interesting topic, would love to be a fly-in-the-wall in a meeting between these two.

You should write something about what you do too. Buying businesses sounds interesting, can you expand on this?

You should write something about what you do too. Buying businesses sounds interesting, can you expand on this?

There are lots of books written about buying businesses. I'll give some insight - it's like turning over stones. You turn over a lot before you find anything.

> I'll give some insight - it's like turning over stones. You turn over a lot before you find anything.

Priceless and totally agree.

The deal flow can be streamlined somewhat, but you’re still turning over a lot of stones.

> You should write something about what you do too.

I think most of what one needs to know is already out there. The key is being adaptable to the current environment and being aware of one’s value add (skill set, network, etc.).

The problem with writing specifics about what I do is that it invites competitors and/or haters (e.g., review bombers or DDoSers). Some parts of my businesses have enough moat such that I don’t care, but other parts definitely do not. It’s not something I want to spend additional brain cycles on.

> Buying businesses sounds interesting, can you expand on this?

It’s largely not. It’s financially comfortable, and it’s nice being your own boss / leading your own team if that’s what you’re into (I am), but I’ve done more interesting work while working for “The Man”. A lot of what I do is just streamline a system that was inefficiently run/managed.

What I do is very similar to what Andrew Wilkinson of TinyCo has done, except I am about 10 years back on his timeline, and I’m not sure I will end up going public. I recommend looking for interviews and podcasts with Andrew — I have found them to be super interesting.

In relatively vague terms, I started a web dev agency, and then used that cash flow to start buying businesses that generate additional cash flow. Rinse and repeat. This is exactly what Andrew did. Note that I didn’t learn about Andrew until last year, so I was happy to see someone taking a similar path and scaling to a holding co worth over half a billion.

Some things that I think folks don’t do well when buying and/or valuing businesses (both buyers and sellers):

- Keep an active deal flow pipeline, ideally one that is not widely tapped. This usually entails talking to people… lots of people. For example, finding solid businesses on FEI is possible, but they will be very competitively priced, and it will be prudent to have some sort of pocket growth “hack” in mind if you want to make it pay off handsomely. On the other hand, targeting some “mom and pops” that have little or no idea about SEO and SEM can present some soft deals.

- Figure out ways that one party can scale that others can’t. This is the type of “growth hack” that I mentioned above. I know one guy who has one main move. He looks for businesses in which he already buys some of their inputs at a huge volume discount that smaller businesses can’t access (supplements are an example of this… I don’t recommend getting into supplements unless you are already eyeballs deep in that world). Another example is having access to markets or distribution that the businesses you are targeting to buy don’t have. One area I target (when relevant) that many others don’t is East Asian markets. Another area I target is just increasing prices (usually via segmentation). So many businesses charge way less than the market will bear.

- Learn how to negotiate, including how to say no. Many people just lay down and leave a ton of money on the table. You don’t have to be an asshole about it, but it’s prudent to be aware of what the value is for both the buyer and the seller, and it’s not uncommon for the buyer to have significant upside potential.

- As someone else said, you’re basically turning over a lot of rocks. There are a lot of people trying to bamboozle you, and there are a lot of solid businesses that don’t really offer a growth opportunity that you can efficiently maximize. When you find something that fits, it’s often a no-brainer.

Let me know if you have any other questions. I will be happy to answer.

I will add as a caveat that I can only give you perspective from my limited experiences — there are myriad ways to buy and sell businesses profitably, and my path is only one of them.

What is your take on ecommerce businesses that generate most revenue from a single platform, e.g. Amazon or Shein or TikTok?

It seems like a lot of concentrated risk, and scaling is a challenge, considering the number of Amazon roll-ups that were on fire 2020-2021 and are now on the ropes (See "Amazon aggregators fall on tough times", https://www.axios.com/2023/09/05/amazon-aggregators-tough-ti...)

> What is your take on ecommerce businesses that generate most revenue from a single platform, e.g. Amazon or Shein or TikTok?

It’s not something I do due to the “concentrated risk” you mentioned. Scaling can be done, sometimes quite easily and effectively (e.g., Amazon ads can be quite efficient at scaling).

In general, I try to avoid or minimize exposure to capricious single points of failure, especially in sales/marketing, production, and/or distribution. I consider most large tech companies to fall into the capricious category unless I have someone on the inside who can make things right for me. This access to insiders is not as robust as I would like, but I’m working on it.

All that said, I know plenty of quite successful business owners who have gone all in on a single platform like Amazon or YT.

Regarding the roll ups, i think many of the businesses were bought at unreasonably high values. The linked article refers to this.

Covid changed many markets, in some ways permanent, and in other ways temporary. I was passing a lot on what I considered unreasonable prices for certain businesses. I could have played hot potato, but there was no reason to do so.

Idk, optimizing inefficient systems sounds a lot more interesting to me than working for the man, as you put it. Thanks for writing this out. It seems very difficult to get into. I'll reread this a couple times.

> Idk, optimizing inefficient systems sounds a lot more interesting to me

Yeah, I guess I’m being somewhat disingenuous. I like optimizing systems, but I’m aware that it’s not everyone’s cup of tea.

You learn that very quickly at cocktail parties when people ask you what you do, ask for more than the headline answer, and then have their eyes glaze over when you get into the details.

> than working for the man, as you put it.

As a nerd/geek, and I fall into that category, working in a good skunk works type of place is pretty damn fun. It usually doesn’t pay well compared to most tech jobs, it’s often not that prestigious, but damn… it can sometimes tickle the brain like no other.

One potentially bad part of it is that most skunk works are funded in some way by the DoD, so some folks may object to that.

> Thanks for writing this out.

My pleasure.

> It seems very difficult to get into.

Hmm… my first instinct is to say that it’s not, but I might be short-selling my skills, network, and (frankly) privilege if I say that.

I think it’s open to far larger group than is actively trying to participate in it.

I think the main keys are:

- Understand fundamentals of business. I have been around this my whole life, so it came quite naturally to me. That said, it’s learnable, and a lot of things fall into the common sense or empathy categories.

- Be good at contracting and hiring/firing. There are a lot of bozos in the workforce, but there are also plenty of hidden gems.

- Be good at marketing/sales. Although it’s possible, I think it’s tough to hide behind a screen and also scale.

- Talk to your customers. PG beats this drum, and there’s a good reason. Note customers here are customers of any business you own as well as business you want to buy or entities you want to sell a business to.

- Start small, but do things that scale. People think you need a lot of money to start doing this. You don’t. If you do really well, you don’t have to ask around much before relatively large sums of money start finding you. I currently prefer to self-fund, but I’m thinking about transitioning to some sort of dividend growth entity — I think that they will be en vogue in certain circles over the next 10 years or so.

It seems like you enjoy talking about this - is there an email I could reach you at to have a longer conversation at some point down the line? I'm really interested in just about everything pertaining to your experience. If you'd rather not post yours, you could email me directly at [email protected].

Quite difficult to be like you. In any case, much obliged to you, sir!

I have a feeling a lot of the lessons you learned could also apply to developers who want to be better at freelancing (my case). But I don't know if there is a way to pass down that knowledge while you also get something out of it.

For what is worth, I appreciated your comments in this thread.

For freelancers who want to improve (it was my case years ago), the best book is "The Secrets of Consulting", by Gerald Weinberg.

https://www.goodreads.com/book/show/566213.The_Secrets_of_Co...

Thank you for making me aware of this author. I see he has several books on topics I find valuable.

I am glad I was able to help you.

If you like "The Secrets of Consulting", the next one for you should be "Exploring requirements: quality before design", by Gause & Weinberg. What an eye opener it was for me!

Noted.

I read the book 'Built to Sell'[0] recently. It's written for founders, but gives you insight into how buyers think and what they are looking for.

[0] https://builttosell.com/

> (even if he’s some miracle worker, which xooglers aren’t guaranteed to be)

> I can’t tell if you’re circle jerking the owner, xooglers, or the (limiting) engineering way of thinking about businesses.

I don't know why you're being so unnecessarily demeaning about ex-Google people or trying to downplay the accomplishments of the person who wrote the blog post. There's no need to call it "circle jerking" if someone acknowledges that the founder of a successful business has accomplished a lot, well above and beyond what an average engineer can pull off.

> I don't know why you're being so unnecessarily demeaning about ex-Google people or trying to downplay the accomplishments of the person who wrote the blog post.

Fair comment, and I thought about changing it. I didn’t for reasons listed below:

- The comment was mainly directed at xooglers, specifically the mindset some folks have towards them. Googlers and xooglers were something to behold in the “don’t be evil” days. That reputation has decreased substantially since, imho (I’m guessing directly or indirectly due to structural changes in the org). This is not to say that there aren’t some super impressive googlers and xooglers (there are), but the hit rate is much lower than it once was. If the op had just said “a smart engineer”, I wouldn’t have commented on it — I imagine the dude is plenty smart, although I doubt that it makes his efforts difficult to replace (see below).

- In general, I try to take the air out of reputation virtue signals that I think may not be warranted. Google, googlers, and xooglers are now in this category. Other groups in this category are groups like Harvard grads, Stanford grads, MBAs, PhDs, name brand consulting firms, name brand IB firms, etc. Note that I am a member of several groups that sometimes send these virtue signals (I try my best not to), so I’m dog fooding my own criticism every day.

- I don’t know the engineer who owns the business, but I find it unlikely that he does things that both must be done and must be done at a (relatively high) labor price that the owner could command in the market. I expect neither are true. The “circle jerk” comment was a reference to me thinking that the person I was replying to was putting far too much weight on something that has (imho) much less impact on the profitability and ultimately the price of the business. I’m OK disagreeing on this point — different strokes for different folks, and that’s why the market price talks.

These people actually do grow on a tree called Google. All the Google layoffs means there are more smart former google engineers than ever currently available for hire. More importantly, doesn't have to be a former google engineer, any smart engineer can do what he currently does, google didn't teach him anything special they just hire smart engineers when they find them.

There’s a reason they were laid off. I find this mind boggling, I’ve met so many mediocre and low performers that are still highly sought after by simple virtue of having done nothing at faang or Stanford. It’s basically the software engineering professions McKinsey. Everything they touch is a huge money sink with no real added value and probably long term damaging to society and yet somehow they all keep climbing the ladder. All while other actually high value people are just lost in the noise.

I agree with you overall. But the reason someone is laid off mostly likely has no bearing on ability or actions. Not having the ability to influence layoff decisions doesn't mean you were a bad engineer or providing more value than others

I have no particular advantage in this space and don’t even own a TinyPilot. I think it’s worth $250K to me, and think it’s worth much more than that to someone who can create additional value by virtue of having some advantage relevant to the business (existing manufacturing, fulfillment, service, etc ops).

If you are valuing a business on SDE the multiple is usually 2.4-3. So this business as it is today would be worth more like 566-708. The beauty of building a business is that as the bottom line goes up your business is worth more, but it ALSO fetches a higher multiple. So a business with a bottom line of $1M will get 5-7 times earnings (note: not SDE), whereas a small business gets a lower multiple based on SDE.

Valuing a profit-generating business that's making $1m in revenue as zero is reductive.

Valuation of business isn't necessarily determined by profits (perhaps for commodity businesses), It's just one of the metric. This is a business that has strong operations, product, assets, and IP, honestly quite surprised with this take.

Also, a nit fwiw, you automatically assumed the entire profit of the business is the market salary for the person running this business

We don't know that it is profit-generating, since the author doesn't take a salary. As for the assumption that the profit would be soaked up by the market salary for the founder, the fact that he's a former Google engineer or whatever is a pretty decent indication that this is true.

I would agree that most people would take some job flexibility/autonomy in lieu of part of their bigco salary, but my guess is that this particular Xoogler would be making well more than $236k (including stock) if he had stayed at Google.

EDIT: that doesn't mean he should have stayed at Google, just that his market salary would very likely soak up all of the profits this year. If he can keep up the growth (and ramp down his hours), then it would be clearer that the enterprise could throw of cash even after paying for all the labor.

That’s the thing though, it’s a Google engineer’s market salary, and likely the author’s as well. But the OP was drawing the conclusion that whoever’s running the business has to be paid the same amount, that’s what I wanted to address.

> I would agree that most people would take some job flexibility/autonomy in lieu of part of their bigco salary

This is one of the point the author has repeatedly stressed the importance of and I very much agree as well. The chance to chart your own journey and the excitement a business could bring is anyday more valuable than the predictable path of employment for many (including myself)

He did pay himself a salary in 2023. See the P&L included in TFA.

The article says:

> I don’t draw a salary, so the total amount I earned from TinyPilot in 2023 was $236k

I assume the salary line is for other people's salary.

I don't really disagree. It's a naive analysis, but ignoring the opportunity cost of the time the owners put into a business, which I was replying to, is even more naive, and yet an extremely common mistake small business people make.

The point is it isn't profit generating by any reasonable definition of profit and doesn't have some obvious path to get there.

Taking into account all the things you mention, many reasonable people who spend time buying and selling businesses all day would value this business at zero.

The nit is generous - 236k is not going to cover the iq points and hard work required to do the role of this owner.

> Also, a nit fwiw, you automatically assumed the entire profit of the business is the market salary for the person running this business

Not really a big assumption given that the person is capable of operating an entire software and hardware business by themself.

It’s more complicated than that, though: The salary someone receives from a company isn’t 100% passed through untouched. To pay everything from taxes to benefits, the most they could realistically expect to take in equivalent compensation would be closer to $150K (approximate), which is actually below market rate just about anywhere for someone with these qualifications.

That is true, and you would assume that if he sold he would either work retained and draw a salary or hire someone at a fair cost.

I think the company is too early to realistically sell - but I don't think the value today is zero - it's likely worth at least 2x revenue today given growth potential.

Look at lantronix (nasdaq:ltrx) - the company that makes the "spider" product line - the original strap-on oob/ipmi. Worth $160M while doing $120M of revenue and losing $9M/year.

I am disappointed that NASDAQ and US securities regulators allows companies without audited profits to go public. "Worth" 160M? Not to me.

Valuations for vc’s acquiring is very different than private equity firms acquiring a business like this.

If you build something that makes 100k/y it can sell for 7-15x or that.

If your company makes 50K/year profit (which as a bootstrapped founder is what you take home to live with), you haven't created half a million of net worth, you've just created a company that might or might not make it 2-3 years down the line, and which might not be that better than a salaried position from a "net worth creation" perspective.

No way that 7, 15x is realistic. From my previous 2 startups none were sold for more than 4x. And these were healthy growing +10m businesses. I am not sure where you got those numbers from. I am curious.

Thanks for posting this. I was also misinformed, thinking 7/15x was reasonable, but for small businesses valued primarily on cashflow, looks like 3x is more accurate (of course, growth affects that number a lot).

I thought this had a lot of good data: https://www.bizbuysell.com/learning-center/industry-valuatio.... For "Software and App Companies", the multiple was 3.17.

Payback period I assume. 3 years at 3x if revenue is flat. I suspect 3.17 is around 30 months if your revenue growth outpaces inflation.

You built two $10m businesses? Geez man where's your blog post series

It really depends on a bunch of factors, if you've capped out your total addressable market, and/or there's no fat to cut out of the business (i.e. potential is limited) lots of competitors etc, then a low valuation is reasonable.

But if you're growing, have big upside, and can be a rollup or been operating quite inefficiently 4x would be ridiculously low.

> But if you're growing, have big upside, and can be a rollup or been operating quite inefficiently 4x would be ridiculously low.

That's the dream, but the number of startups that check all the boxes to fall into this category is extremely small.

There's a lot of data supporting 2-4X for small SaaS companies. You'd have to be growing at an extreme rate year over year over year for 4X to be considered "ridiculously low".

Why sell a healthy growing $10m business for 4x earnings? Did you have debt to service, or just wanted to do something different, or some other reason?

At 4x it almost seems worth it to hire out the rest of your day-to-day and let the operation cruise. The company will probably under perform over time but you'll get more juice from the fruit.

With how fast tech is pacing there's no guarantee that this business wouldn't be outpaced by competitors, and so if you stay idly by and provide no innovation, the business might just fizzle out.

> At 4x it almost seems worth it to hire out the rest of your day-to-day and let the operation cruise.

As many small business owners learn the hard way, it's nearly impossible to find someone capable of single-handedly operating a small startup who would rather operate your startup than their own startup.

Frequently, you can find someone to take the role for a while. They might even perform well while you're training them up. Then they're likely to go off and start their own thing, which might come uncomfortably close to competing with you (while staying just outside the reach of noncompete agreements).

Because valuation is different than the actual yearly revenue. Company could be valued 10m, but revenue 1m. In our case because of legal permits we aquired to run our business and would normally take up to two years to get.

so 10x revenue, which seems pretty decent for tech

Was management in place so when the founders exited the company would still grow? With lower valuations (1-3x), the purchaser is often buying a job in some way (either for themselves or needing to find an operator). At 7-10x multiple, the company is already has senior management in place so the new owners would expect continued growth without their own intervention.

Ouch. Businesses sell for more than 4x all the time. There are countless examples of that.

Businesses sell for 0x and Infinityx all the time. There are countless examples of that.

But bootstrapped business with growth rate for 7x+ (non-trivial) revenue are uncommon.

4x may be "ouch" for a VC but not a bootstrapper.

The last startup I was at that sold 'only' made the owners millionaires, when they were hoping to retire.

If you're in your thirties or forties, a million bucks won't even get you a school teacher's lifestyle for the rest of your life. A million bucks makes the rest of your work life low-stress, but not non-existent. You still have to work, you just don't have to worry about paying rent, or getting exploited by your boss. You can always quit, and you can always say no (one of the reasons some bosses like a hint of desperation on their employees)

They bought water view condos, one got his teeth fixed, and then they had to go right back to work.

Interesting story.

Forgive me but I'm not sure I see the relationship to my comment.

A million after taxes is worth 20 years at 100k after taxes (50% rate).

Investing a million today say in real estate over 20 years will give you money to live on while you rent and a the property can be sold for double in 20 years. Repeat and this strategy would bring increasing wealth for a 20 year old.

No one makes $100k and pays $50k in taxes.

Give the examples. Businesses this size in this market have very few (/0) logical buyers.

I can't speak for valuations, but I don't see the 'no logical buyers' argument. This product has multiple competitor products, mostly at far higher price points, any of those manufacturers would seem like a logical buyer to me (if only to get rid of the competition). Can you elaborate?

You aren't just buying a company, you're buying a job. In this blog post, the payroll expense is $250k a year. The founder is working for free 40 hours a week, acting as a software dev, managing a $40k advertising budget, developing the product, and overseeing the customer support team.

If you buy this company and hire somebody who can do all those things, that $235k of net profit becomes $0.

Buying it just to shut it down without continuing the product- eh- does your product really address all the needs of the customer base? Or will they go to another competitor instead?

It's small. There are very few logical buyers of technically complex small businesses. There are logical buyers of small businesses and logical buyers of technically complex businesses, but at the intersection there is not.

Even bog standard SAAS companies struggle to sell at a decent multiple when they are really small, and they aren't especially complex.

I think this is one of those areas where a competitor buying you can make sense. Either your product is attractive to higher margin customers, at which point they are buying into a higher end market, or your product is part of the low-end, and by buying you out and shutting you down, they hope to convert some of your lower margin customers to higher margin customers, and let some of your high-maintenance customers go bother one of your mutual competitors (which is honestly the most Sun Tzu-ish, borderline Machiavellian, reason to fire a customer)

Not in the small cap SaaS world.

2-4X is the current range.

The exceptions are for companies with extreme growth rates for multiples years in a row. These are extremely rare, even more so with pure bootstrapping.

What market were they in? What did the growth and earnings look like?

Valuation is only useful if you're looking for an exit, and maybe if you need to borrow a lot of debt (but if you're bootstrapped, that's not on the table). For lifestyle startups, profit is cold hard cash and valuation is a number in a spreadsheet.

> creating a company that should be valued (and eventually sell) for 7-15X Earnings

Only high-growth, high-margin businesses can get 7x+ earnings.

Creating a sufficient level of growth to garner 7x valuation is very tough to do bootstrapped.

---

EDIT: The only reason anyone gets a 10x etc valuation is because they're doubling+ year-over-year, and very likely they'll be 3x bigger in 18 months.

So basically, that's a 3-4x valuation...of your probable revenue in a year and a half.

I think you need to have ARR(annual recurring revenue) to have a multiplier like this. I think the company makes money when somebody buys the device, but that's it.

It would also help to know the TAM(total market area). How big is the remote KVM market? That gives you an idea on how many devices it's possible to sell in a given year.

Looks like the device sells for about $400.

It wouldn’t be that bad if you are already substracting salaries right? Having a few years in which your earnings are zero due to purchase price is pretty doable if you start earning a cool 100k every year after (even better if it’s a growing business).

> Only high-growth, high-margin businesses can get 7x+ earnings

Not really, the S&P 500's P/E multiple has historically been at around 15x and now is somewhere around 30x [0]. And with that, we're talking about large, mature businesses that are not growing super fast -- more like 6-7% annualized, post-inflation [1].

[0] https://www.multpl.com/s-p-500-pe-ratio

[1] https://www.investopedia.com/ask/answers/042415/what-average...

Sorry, I should have said revenue.

There is a lot confusion in this thread (sorry) over "earnings multiples" vs "revenue multiples."

On HN you will almost always see revenue multiple discussed.

Any historians here who can comment on when people first started selling their businesses? And when did the notion that you build a business to sell it, first emerge?

This is encouraging as someone who is very comfortable with the development side of my studio but still finds the business side daunting at times

Those multiples only work if you are growing so fast that you start to become a threat to an incumbent. Otherwise, you can halve that easily, it all depends on what you do as a business and how hard it is to copy what you are doing. High multiples require strong growth, strong IP and a shortcut compared to redevelopment.

Great advice here!

The math on multiple needs a revision for 2024. SalesForce and Atlassian are valued at 6x and growing faster than ever with over $1B in revenue. No one else is getting a better multiple than that in SaaS right now without a very eager buyer.

Enterprise Value is great in theory. In practice once you get to enough free cash flow you are really just making the decision on whether to take X years of profits in advance for selling all future profits.

Even at 2x-3x, it comes out to “I’ve made enough money/I’m tired, I’m gonna cash out and pay a big tax bill.”

I’d rather make a business that is run by the team and stay with it.

QSBS equity ownership is common amongst US bootstrapped businesses; which can change the tax concerns upon sale.

more like 3.5/4x sales for a small saas not certanly 7-15x

not relative to sales, relative to earnings

Not everybody wants to sell their startup though. Accessing that liquidity without selling can be very very risky. Also, small companies like this can’t command big premiums because too much operational/institutional knowledge is held by the owners, so a lot of that “profit” is really more like a wage for the founder.

I’m in the infancy of a bootstrapped company while witnessing the general enshittification of all these formerly treated VC backed companies as they prepare for /adjust to being public companies. I also recall many decent products like Quora (yes there was a period where it was actually good) go to shit and fail chasing $$. I feel like the culture is shifting for new founders and a lot us want to aim for sustainable businesses that deliver real value rather than VC moonshots that say yes to everything that makes them more money.

I think “lifestyle” business carries negative connotations and bootstrapping/roof shots don’t capture this mindset yet. For me personally I guess it’s like, I’d rather have a $100m business that does cool shit and is focused on doing one thing, than be forced into chasing growth at all costs in all directions to get a potentially much bigger exit. If I had such an exit I’d draw it down at a sustainable rate anyway that ends up not being different from the earnings of a private company of similar value.

I guess with similar luck and results maybe I could be a billionaire instead of a hundred millionaire, but idk if that really matters, and I’d then get the typical SV meaningless ennui while being glad to leave the shitshow I created before it got even shitter. Running something I’m proud of for the long term seems like a more meaningful and rewarding way to spend my time and it can actually make the world better even if it doesn’t capture as much of that value.

Like, what if the dominant social media company had refused to serve ads and optimize for watch time? What if major cloud providers had a cohesive vision instead of cobbling together every stupid thing a $100mm spend customer wanted? What if YouTube could serve recommendations based on similarity/enjoyment? They could still be major successful companies. But selling your company, taking on investors, and maybe even lending against your equity threatens to destroy that.

It is in my experience that not all businesses can be sold.

>you're creating a company that should be valued (and eventually sell) for 7-15X Earnings

Why should an exit be the primary goal? There is nothing wrong with starting a business with the intent of continuing to run and own that business. This should be normal.

For some I suspect that it's not the primary goal, but when some investors pull up with an offer in that range it seems irrational not to take it.

Problem with valuations is that there has to be a buyer for that 7-15x. There is a lot of businesses that are not sellable because “owner is the business” and then comparing to normal job makes sense, because that is other realistic alternative.