Depth-to-Multiple Pattern
When you need this method
Valuation multiples for B2B software vary enormously, and leadership teams look for a pattern explaining why comparable companies are priced so differently. One possible ordering: companies whose strength sits early in the chain (position, demand) get valued as a bet on the future; companies with late strength (economics, compound) as a bet on existing retention. Whether this pattern holds is open.
Approach
- 1Use the five-layer scan to determine where in the chain the company's defensibility primarily arises.
- 2Phrase the expectation as a hypothesis: early green points toward equity and growth logic, late green toward cash-flow and PE logic.
- 3Use the classification solely as a thinking device for conversations and scenarios, not as a basis for valuation.
- 4Collect verifiable multiple data points to test or discard the hypothesis over time.
Typical application
A typical case: a leadership team debates whether to shape the company toward a growth round or a later cash-flow-oriented sale. The scan shows strength late in the chain: high retention, solid economics, but little category pull up front. As a thinking hypothesis, that points toward the cash-flow track and against the narrative of a category bet. The team explicitly treats this classification as a working assumption and tests it against real market signals rather than basing decisions on it alone.
Limits and counter-indications
The pattern is an unproven hypothesis: it rests on only two to three public multiple data points, a sample far too small for a rule. It must not be communicated as a finding or forecast. The related deal-type lens has already been refuted as a predictor; the same caution applies here.
How to measure impact
The number of verifiable multiple data points supporting or refuting the hypothesis; only with a viable sample would an upgrade be conceivable.
Related methods
Sources
- 1.Strategic and Financial Bidders in Takeover Auctions (opens in a new tab) · The Journal of Finance 69(6) (Gorbenko, Malenko) · 2014 · academic and scholarly literature · supports the underlying mechanismSupports the direction of the hypothesis insofar as, in 22.4 percent of the auctions examined, mature, underperforming targets are valued more highly by financial bidders than by strategic ones. The majority of targets are still valued more highly by strategic bidders, and the source does not examine valuation multiples.
- 2.Hacking Software's Rule of 40 (opens in a new tab) · Bain & Company (Depeyrot, Heap) · 2018 · investment, consulting and analyst firms, industry bodies and public agencies · provides benchmark figuresShows across 124 listed software vendors that young companies meet the benchmark through growth and mature ones through margin, meaning the market looks at different measures depending on maturity.
Origin: Convios
From method to metric
The offer that fits this method
A method works when it starts at the number that needs to move. The scaling audit names the constraint behind that number and the lever that works first. The 90-day lever implements it with your team.