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Exit Multiples on the Rise

Exit Multiples on the Rise

Not too long ago, generalist VCs eschewed energy and industrial software startups for their long sales cycles and low exit multiples.

While the former may still be true, the latter is changing quickly.

Rockwell Automation announced their acquisition of Plex Systems for $2.2B on Friday.  The price represented a 15X multiple on TTM revenues. Late last year, Aveva acquired OSIsoft for ~10x revenues at $5B.

These pricing trends aren't just happening in the private markets, Procore IPO'd for 21x revenues and currently trades at 28x.  Autodesk, a mature construction design software company, trades at 17x.

To understand what this means for venture capital and private equity investing, take a look at an example investment.

If a firm were to invest in a startup at a $100M valuation representing 30X revenues (3.3M in TTM revenue), here are the revenues needed to underwrite a 5x multiple on invested capital or a $500M exit.

  • 10x revenue valuation: $50M
  • 15x revenue valuation: $33.3M
  • 20x revenue valuation: $25M

As you can see, the targets vary dramatically.  In fact, for each 5x increase in the valuation multiple the potential exit timeline likely shrinks by a year, increasing IRR as well  

So, why are multiples increasing quickly in the sector?

  1. OT/IT convergence: hardware and software are increasingly interlinked, meaning the software is now a critical component of asset-heavy businesses and a key differentiator.
  2. Customer demand: energy and industrial customers now expect software solutions and demand an easy to use, all-encompassing product
  3. Traditional technology giants as acquirers: Oracle, SAP, and Microsoft among others see the opportunity in the digitization of industry and energy.  As a result, they are bidding on strategic acquisitions to gain market share.

I firmly believe this is just the beginning of a new paradigm for exit multiples in energy and industrial tech. Vertical software in the space is responsible for automating, securing, and analyzing trillions of hard assets - the markets will continue to value them accordingly.