🎯 Goal: Understand why P/E doesn't work for startups and the alternatives.
Early-stage startups often take losses to grow fast, so P/E is meaningless (no earnings to divide). Instead: value by a revenue multiple (EV/Revenue) vs similar firms; check unit economics — compare LTV (lifetime value of a customer) with CAC (cost to acquire one), where LTV/CAC ≥ 3 signals a healthy model; and the market size (TAM) with growth rate. Because it leans heavily on future expectations, startup valuation is easily inflated — stay skeptical.
Let’s explore
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Early startups usually have no profit → P/E can't be used (no "E"). Other methods are needed.
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Value by a revenue multiple (EV/Revenue) vs similar firms, combined with growth rate and market size (TAM).
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Unit economics: LTV (a customer's lifetime value) vs CAC (cost to acquire one). LTV/CAC ≥ 3 signals a healthy model.
Practice activity
🧮 An app: each customer brings 1,500,000đ lifetime profit (LTV); acquiring one costs 400,000đ (CAC). LTV/CAC ratio?
Worked example: LTV/CAC = 1,500,000 ÷ 400,000 = 3.75 (≥ 3) → each dong spent acquiring customers returns ~3.75: healthy. If CAC rises to 800,000đ, the ratio drops to ~1.9 — worrying, since the profit per customer barely covers acquiring them.
Quick quiz
1. Why is P/E hard to use for early-stage startups?
→ Usually no profit yet (no "E")
2. EV/Revenue values a firm by?
→ A revenue multiple
3. LTV 1,500,000đ, CAC 500,000đ. LTV/CAC ratio?
→ 3
4. LTV/CAC ≥ 3 usually shows?
→ A healthy business model
5. Startup valuation leans on future expectations, so it?
→ Is easily inflated, stay skeptical
🎯 Real-life mission
Think of an app or service you use often. Estimate: how much value a user like you brings (LTV), and roughly how much they spent to get you (ads/promos = CAC). Is the model healthy? Why?