Are Early Stage SaaS Investors Getting a Good Deal?
As a soon to be SaaS investor, and follower of the industry, I thought it might be interesting to take a look at early-stage SaaS startup valuations. So much of the zeitgeist lately has been centered around a bubble, with naysayers calling for impending doom, Series (insert letter here) crunches, and outrageous unicorn valuations. However, most of these claims have tended to be anecdotal — I thought I should take a look at early-stage SaaS valuations, and see if there was any truth to what they were saying.
The onset of cloud computing has led to the rapidly decreasing cost of starting a company, especially a SaaS company as compared to traditional software companies of the previous decade. At the same time, the velocity of the growth of these SaaS startups is increasing, as sales cycles have shortened, and per-user monthly licenses make small servings of this software palatable to whole new swaths of consumers. SaaS companies have emerged for every vertical and niche, with some attacking the old guard of tech (Oracle, SAP, Microsoft), and others going after completely new, untouched verticals. With all this change, this begs the question of what is the new value of a SaaS startup at each stage, and is this value warranted?
I needed a way to compare valuations across time periods and across stages, and so analyzing median post-money valuations indexed to Q1 ’13 seemed like a fair way to accomplish this. Unfortunately, revenue metrics are not readily available for most of these deals, which causes a sample bias toward high-profile companies if only those companies whose revenues at deal time are known are used. Thus, with an implicit assumption that the same revenue milestones are reached by companies raising at time of raising a Series A, B, or C, we can compare these post-money valuations over time. I also included a relative index of Enterprise Value/Revenue of publicly-traded SaaS companies (taken from the BVP Cloud Index) to benchmark against.
As we can see from the chart above, there is a clear uptick in Series A valuations, that is not being driven by public market valuations (currently ~9x trailing revenue). However, as we see above, the Series B market has not risen in the same fashion (approximately flat over the past two years). The Series C market is erratic, likely due to a smaller sample size, and a high starting point in Q1 ’13.
The large rise in Series A valuations, without a corresponding rise in Series B and C valuations, is interesting. Some have speculated that this is due to a seed boom, leading to higher Series A valuations as a result, while this might also point to higher revenues/metrics for companies going to raise their Series A. Yet, the flat Series B and C levels indicate that these companies are not able to sustain premium multiples.
While the high-flyers in the industry can command premium valuations at every level driven by their spectacular growth, this should signal a warning for Series A investors that they need to be cognizant of the price that they are paying, and that B round investors might not pay multiples as high as they themselves did.
