SaaS multiples cratered
It turns out SaaS isn’t immune to market conditions: of the 77 SaaS companies we follow, the average public SaaS business is trading at 8.07x revenue while the median is 6.66x. The average and median are down from 8.91x and 8.29x in November, respectively. The drop in the median is significant in our view and indicates that the “typical” SaaS company feel hard. The average didn’t decline as much which tells us “premium” SaaS properties such as Salesforce held a bit more of their value, but still fell by nearly 1.00x. The data is below.
Negative EBITDA, positive cash flow. The median SaaS business had trailing twelve month revenue of $390mm, EBITDA of -$11mm, but positive cash flow of $34mm thanks to deferred revenue and up-front collections on annual contracts. Indeed so long as you’re growing (the median annual growth rate is a respectable 39%), investors will overlook negative EBITDA especially if the business is cash flow positive after working capital changes.
The trend has broken. The chart below shows median revenue multiples we’ve collected since Q4 2014. During that period, the median SaaS multiple has ranged from 4.43x to 9.32x with an average of 6.69x. Today, we’re at the middle of that range.
SaaS margins are still terrible. Investors and founders love saying “SaaS margins are great.” They’re not. They’re horrible. The median EBITDA margin for the companies above was -5% and the average was -3%. Fixed costs for SaaS are terribly high and worse yet those fixed costs are mostly people, meaning the only way to materially cut costs is layoffs. If you’ve ever fired someone, you know cutting costs by cutting people is not easy and hurts the culture and morale of remaining members.
Growth is respectable. 39% is strong given the size of these companies.
SaaS businesses are healthy. There is almost no debt on these businesses as banks don’t like ‘asset-lite’ businesses like software. Additionally, these companies have $206mm of cash on the balance sheet on median, equivalent to over a decade of burn (recall EBITDA is -$12mm). The number of years of cash on the balance sheet is less important given that these businesses are generally cash flow positive (median of $34mm), and indeed only 13 out of the 77 have negative cash flow. Note that 42 out of the 76 have negative EBITDA, but again that’s acceptable so long as the growth is there and cash flow overall is positive.
Recent IPO’s are killing it. Four of the latest SaaS IPO’s (Docusign, Smartsheet, Z-Scaler, Zuora) are trading at an average valuation of 13x revenue. It shows that now is a great time to come to market whether you’re raising money or selling the business. Survey Monkey, the latest company to IPO, is trading at a much lower 6.29x, but that’s in large part due to it’s nearly flat growth.
So what’s this data mean for a fast growing private SaaS business? Public multiples and trends tend to guide what’s happening in the private markets: i) as compensation for illiquidity, size, and lack of profitability, prudent investors will look to invest in your private SaaS business somewhere below the median unless your growth rate is demonstrably higher than 39% YOY; ii) financing will continue to come from equity, less so from debt, although we’ve seen banks like Bridge Bank get more aggressive and lenders like Lighter Capital get more creative; iii) and burning cash is still acceptable on an EBITDA basis, so long as free cash flow is positive or moving in the right direction. All that said, the median revenue multiple is down demonstrably — while we don’t believe it will impact private market valuations immediately, if the trend persists, in a few quarters privates will adjust to the lower levels.
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