Swedish startup Red Flag sells accounting software to SMEs for €48 (SEK 498) per licence per month.
Red Flag just raised €1.6 million (SEK 17 million) from Andreas Ehn and others.
Di Digital reports that Red Flag raised its €1.6 million at a €20 million (SEK 211 million) valuation.
Assume, based on comparable deals, that Andreas Ehn wants to make 10x on his investment.
Exit value = valuation * money multiple.
Then Red Flag’s €20 million valuation requires a €20 million * 10 = €202 million exit value.
To simplify, this ignores dilution. To make 10x with 50% dilution, the €20 million valuation actually requires a €20 million * 10 / (1 – 50%) = €403 million exit value.
Assume, based on comparable companies, that Red Flag trades at 5x revenue per year at exit.
Revenue per year at exit = exit value / revenue multiple at exit.
Then Red Flag’s €202 million exit value requires €202 million / 5 = €40 million revenue per year at exit.
Red Flag charges €48 per licence per month.
Licences sold per month at exit = revenue per year at exit / 12 / price per licence per month at exit.
Then Red Flag’s €40 million revenue per year at exit requires them to sell €40 million / 12 / 48 = 71,000 licences per month at exit.
Obviously, Red Flag doesn’t need to sell to 71,000 new customers per month at exit.
They do need to sell 71,000 licences per month at exit.
Both to the very large percentage of customers per month that stays – the ones that make up the recurring part of the revenue. And to the much smaller percentage of customers per month that are new.
For context: Sweden has approximately 700,000 SMEs.
Last paragraph edited for clarity on February 19, 2019.