In the SmartUp curriculum, exit multiples are explained through clear financial logic rather than speculation. Yonatan Stern emphasizes that valuation is derived from measurable performance. A common example used is the Price-to-Earnings (P/E) ratio. Stern notes that profitable companies are often valued at around 20 times earnings. For instance, if a company generates $1 million in net profit and the market applies a 20x multiple, the company’s valuation is $20 million.
Stern explains this logic using a bank interest analogy. A 20x multiple is equivalent to receiving a 5% annual return, similar to investing $100 and earning $5 per year. This makes valuation predictable and grounded in cash generation.
Growth plays a significant role in determining exit multiples, especially in the Venture Capital model. Investors assess future value by projecting growth rates. If a company generates $100 million in revenue and grows at 50% year-over-year, investors anticipate much higher future revenues, which justifies applying a higher multiple to current performance. Additionally, profitable companies can command a strategic premium. Stern explains that a public company trading at a high multiple may be willing to pay a similar multiple for a profitable startup, because each dollar of acquired profit increases the buyer’s own market capitalization by that higher multiple.
From the VC perspective, the exit multiple also represents the return on invested capital. Venture Capital funds rely on a power-law model where one investment must generate a 10x or greater return to compensate for multiple failures. This drives the pursuit of Unicorn-scale outcomes. SmartUp contrasts this with a more modest approach, where a company raises a small amount of capital and exits at a reasonable multiple. In such cases, founders can achieve significant personal returns by retaining more equity.
SmartUp advises entrepreneurs to focus on profitability rather than chasing speculative multiples driven by hype. Stern compares a profitable company to real estate: an asset that produces cash. Because it generates predictable returns, it attracts buyers willing to pay a healthy multiple, making exits more reliable and less dependent on market sentiment.
