# Tech IPO valuations

Ted Tobiason, MD of Deutsche Bank ECM, and possibly the only person allowed to twitter at DB, came up with a fairly interesting equation to value tech IPOs.

$Valuation = \frac{(G+L)^2 * P}{R}$

where

$G = \text{top-line growth for the next 3-5 years}$
$L = \text{the product of leadership * the addressable market}$
$P = \text{long-term profit model}$
$R = \text{risk}$

While the numerical values assigned to these variables is of course subjective it gives an idea of what characteristics are usually met. Despite this, IPOs are obviously still subject to windows of opportunity and valuations vary dramatically.

What is also not included is the "Big Idea" component of a company, i.e. its disruptive power. One might argue that this is included in G, L, and P but there is probably another layer to a valuation that should apply to companies such as Google etc (at their time of IPO).

In any case, the Facebook IPO is just around the corner so we will know more at the end of this week.

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### One Response to Tech IPO valuations

1. Johan says:

I remember when I studied physics that we used to derive formula`s based on assumptions. Assuming that we believe in DCF, how would you derive that formula?

Sounds like hocus pocus to me, and solely based on empirics.