What is the typical valuation of a software company during its lifetime?

To begin, software companies are complex organizations made up of intangible assets directed by idiosyncratic individuals. As much as firms are studied, they remain poorly understood. So at this point I am not prepared to say that there is a typical growth curve or valuation profile for any company, no less a software company competing in a terribly dynamic and competitive market.  

Early in my venture capital days, circa 2000 or so, I set out to define what I called a "cubist" approach to the valuation of startups. Using empirical evidence, I wanted to define certain valuation profiles for any company according to its industry, revenue model and [age/velocity/acceleration].  Each of these three qualities would comprise an axis forming a cube containing a total of 27 different growth patterns. This would enable more efficient assessments of valuation. It has been an elusive goal.  

Many years later, after a career in investment and a later career specifically in securities valuation, I can share three pictures with you that exhibit the valuation patters of three companies sampled over a five year period. These are illustrative examples, not archetypes. The valuations, though faithfully measured, use a mix of methodologies during a tumultuous time period. 

Steppes & Plateaus

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This story begins with the founding of the company in 1999.  It received venture funding shortly thereafter, and enjoyed successive up-rounds even after the disaster of 2001, dipping slightly during the nuclear winter of 2002-2004.  Stair-steps in 2005-2007 and 2008 followed early promise of revenue growth. Since that time, the company's valuation has remained flat despite revenue growth. 

Spring Redemption

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This story begins in 2003, in the middle of the nuclear winter. The company is venture-financed shortly after its founding, and then proceeds to raise modest amounts of capital through a long and torturous period lasting up to mid-2010.  At some point, the proof-points really start to hit. Rising valuations in 2010 and early 2011 reflect the success of the company, and then BANG the company is purchased for a tidy sum by a strategic corporate acquirer. It's an overnight success, nine years in the making.

Home Grown

This story could not have been told without a large number of loyal and patient angels. From 1999 to 2006, the company was financed by a large network of angel investors who believed in the entrepreneurs and their vision. In 2006 the company was "discovered" and achieved its first venture financing, followed by successive rounds at higher valuations. Today the company is a well-respected competitor within its niche and continues to grow. Secondary market transactions have rewarded the angels for their patience, and the company continues to grow. 

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These three images and brief storylines are an attempt to illustrate what happened to real companies in the real world. They are three examples chosen from many thousands of companies. For me, what they illustrate most clearly is that, typically, building a successful company takes a very long time.