Welcome to the fourth and final installment of Big Bets, a special series of “Small Bets” that breaks down later-stage investing concepts.

Big Bets is brought to you by Jamie Melzer and Katie Nowak of HF Scale Partners. HF Scale invests in pre-IPO venture-backed technology companies through primary rounds and secondary transactions.

First, a recap

In our prior Big Bets installments, we unpacked the Risk Curve, traveled through time in venture capital history, and explained the risk profiles across startup stages (early, growth, and late-stage).

Today, we are going to dive deeper into a popular question:

“How do you evaluate late-stage companies?”

Become a due diligence detective

No, really—becoming a detective is the first step in evaluating and valuing late-stage companies (or any company, really).

Information is a key way that we derisk our investment decisions. To understand if we at HF Scale Partners are coming in at an attractive price—or if we want to invest at all—we learn as much as possible about the company, industry, and competitive environment.

Here’s a quick outline of the steps in our fact-finding mission, aka due diligence:

Each investment is a new fact-finding mission

Our diligence process is unique to each company that we invest in. At HF Scale, we invest in both primary rounds (e.g., Series D, E, F) and secondary transactions (purchasing shares from an existing stakeholder) for growth and late-stage companies.

When we invest through primary rounds, we often have deal room access. A deal room has resources that the company has prepared for investors like us, from cap tables to legal documents to historical and projected financials. While we still do our own research, the deal room makes our diligence process much more streamlined.

When we invest through secondaries, it’s a litttttttle trickier to get access to all of this information. We really need to put our detective hats and monocles on. As a reminder, a secondary transaction is when we purchase previously issued shares from an existing shareholder (e.g., an early employee who needs liquidity to buy a home).

There is usually no data room for secondary transactions, so we double down on fact-finding. We scour the internet and our network for public and private information until we have what we need to make a go-or-no-go decision. Sometimes, that means recreating financial models from scratch based on trusted news sources, podcasts, investors in our network, and conversations with company executives.

It’s quite the process… but we love it!

An example exercise from our diligence process

We’ve picked one of the more straightforward but impactful tools in our process: the Comparables Analysis.

We use Comps Analysis to determine the value of a private company compared to similar public (and sometimes private) companies.

Here’s how it works:

1. Identify comparables: We first find companies similar to the one we are evaluating. These could be direct competitors in the industry, incumbents, and/or other startups. It could also be companies in a different industry, but with similar metrics (gross margin, revenue growth, etc). These are called “comparables” or “comps.”
2. Examine financial metrics: We then pull metrics for each company over the last 3 years and projections for the next 3+ years. We capture financial metrics, including revenue, margins, EBITDA, profitability, NRR, market share, and enterprise value.
3. Calculate ratios: Investors love ratios—us included! Using the information we’ve gathered, we calculate ratios like Enterprise Value to Next 12-months Revenue (EV/NTM Revenue), Enterprise Value to EBITDA, Price-to-Earnings (P/E ratio), and others.
4. Compare and analyze: By comparing these ratios across different companies, investors can see which company offers better value. As an example, if one company has a lower P/E ratio than its peers, it might be undervalued and potentially a better investment. It could also trade at a lower P/E multiple because it has lower growth or a smaller TAM vs other companies and isn’t undervalued at all.

It’s a nuanced exercise. It’s important to remember that the valuation of any investment is the present value of its future cash flows. The Comps Analysis is just a shorthand way of comparing metrics and valuations across multiple companies to help determine an investment's relative attractiveness.

Here’s an example of a Comps Analysis that we ran for a recent investment in the gaming industry:

The resulting public comparables helped us understand how public markets value similar companies and whether we paid fair market value for our private company investment.

In this case, the Gaming Company’s EV/Revenue ratio is significantly lower than the industry average. As an example, the Gaming Company’s EV/Revenue ratio is 3.1x based on 2024 estimates, while its growth is at the high end of the competitor set. This analysis is one of many factors that we review to help us get comfortable with our investment decision.

The Comps Analysis is a useful screening and analysis tool if you’re investing in late-stage private companies, especially those likely to exit via an IPO in the public markets.

Want to learn more about late-stage investing?

If you’re an accredited investor and are interested in learning more about how you can invest in pre-IPO companies, you can apply to join our network of 1,000+ accredited investors and family offices.

In the meantime, thanks for joining us on our Big Bets journey! We hope you had as much fun reading as we did writing.

See you next time,

Jamie + Katie

Big Bets is brought to you by Jamie Melzer and Katie Nowak of HF Scale Partners. HF Scale invests in growth and late-stage venture-backed technology companies through primary rounds and secondary transactions. Want to learn more? You can find us here.