An approach to valuing companies that relies on comparing a company's stock price to its income from operations, cash flow from operations, or earnings per share. The higher the multiple, the more richly valued the company is. Underwriters use valuation multiples of an IPO's peers, or comparables, to determine the appropriate level at which the IPO should be priced. Likewise, investors use valuation multiples to find a target price.
Venture Capital firms invest in private companies that need capital to develop and market their products. In return for this investment, the venture capitalists exact a price – significant ownership of the company and seats on the board of directors. For the most part, venture capitalists focus on companies in the technology, medical and retail sectors, and typically shy away from capital intensive business models. Venture capitalists raise money from institutional investors, state pension funds and high-net-worth individuals, usually in the form of partnerships. Investors should consider the venture capital firm’s track record and expertise when evaluating an IPO.