I was talking to a very successful entrepreneur recently about valuations of startups as they grow. Specifically, valuation multiples for an evolutionary startup with great revenues vs. a revolutionary startup with good revenues, especially when both are still in early-stage. 

In an evolutionary startup, the product offering is just that – evolutionary. That is, the industry has been moving in this direction for years. The valuation of this startup can be good due to traction, but as an evolutionary company in an established market, competitors will follow and then the evolutionary product becomes substitutable. Its multiple is likely less than 4X.

In a revolutionary startup, the product offering is defining a new space. Getting traction can be hugely difficult like pushing a boulder up a mountain. But once momentum hits, the valuation multiple can be significantly higher due to the meta knowledge and technology surrounding the startup. Yes, a startup doing well in this new revolution will create second-movers. However, proprietary technology and knowledge can be hard to emulate, and with capital, the company can continue to outpace new challengers and drive significant value. 

Being a second-mover has its advantages; namely, requiring less capital to go to market as the first-mover because the first-mover is spending more effort educating the market. However, a well-capitalized, experienced team at the helm of a first-mover can outpace second-movers, and drive up the valuation against second-movers — and evolutionary markets/ companies. For revolutionary products, expect multiples in excess of 6 or 8X revenues.

Consider your next startup idea/ product – is it evolutionary or revolutionary? How will you defend your position and drive up the value of your company and your offering?
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