How To Increase The Value Of Your SaaS Business
Tags: Marketing, Saas Marketing, Web Development, Valuation, SaaS

This section of the website sets out a variety of materials relating to investment banking and private equity to be used for educational and non-commercial purposes only; the author(s) of the blog do not intend the blog to be a source of legal advice. According to Software Equity Group, SaaS software revenues will likely represent about 25 percent of the overall software market in the next five years. 11 percent anticipated free cash flow in 2019 (could be higher). In their popular book Valuation: Measuring and Managing the Value of Companies, McKinsey & Company described an analysis they did in which they estimated the earnings multiple of the stock market at specific points in time over a forty-year period based on a forward-looking cash flow model. A nice (and deliberate) aspect of the descriptions is that they include eras long enough so that major drops in the stock market (e.g., the dot-com bubble and housing crash) are placed in a proper context. Some software vendors are converting their software delivery and revenue models to SaaS, while others acquire SaaS companies to gain access to this market.

Software vendors across the world are embracing the software-as-a-service (SaaS), cloud-based business model, in growing numbers. Four of the latest SaaS IPO’s (DocuSign, Smartsheet, Z-Scaler, Zuora) are trading at an average valuation of 17x revenue. This is just one admittedly oversimplified way of looking at the very complex formula of valuation. The Dropbox IPO was well-received by the market, quickly pushing the San Francisco unicorn to a higher public valuation than the one it last commanded while private. Those assumptions and their robustness drive the valuation. This misunderstanding created bad assumptions and led to bad investment decisions. The technology-focused investment banker helps reduce the risk of business erosion with improved confidentiality while allowing the owner to focus on running the business. While the number of public pure-play public SaaS companies is limited compared to other sectors, it is important to note that traditional software companies that are public also offer SaaS solutions and increasingly so. Let’s say, hypothetically, there were SaaS companies with very talented management, large revenue bases, high historic growth rates, great products, and proven development and sales capabilities attacking tremendously large markets with incumbents that were constrained by technology and legacy deployments from responding. At deeper levels-operating margins, Capex, discount rates, perpetual growth rates-this gives you a framework to work with.

It is important to emphasize that the revenue-based valuation model is solely based on growth. We know roughly the assumptions the market is pricing into the valuation of these companies. It squared the circle, so to say, for me by explicitly tying the shorthand language of multiples to the more meaningful underlying assumptions about fundamentals. My goal with the above is to make clearer the language we should use to think about SaaS valuations. Luckily we have several powerful tools to make that easier and one of those is our own David Newell. The following chart shows the progression of the average customer life of customers for companies that have been delivering SaaS from one to ten years, at 10% and 15% average customer churn. However, net retention shows customers are continuing to find value in the product, while increasing product reliance and usage, thus driving higher customer lifetime value. While this results in a cash ‘squeeze’ in the early period after the launch of a SaaS product, investors still prefer recurring revenues as they lead to higher lifetime value (LTV) per customer. While recurring revenues are usually preferable to providers and investors alike, the nature of the monthly SaaS subscriptions — as opposed to a one-time transaction fee — shifts the emphasis to customer acquisition cost (CAC) and retention (churn) as keys to the survival and success of SaaS companies.

SaaS companies have similar up-front revenue acquisition expenses as product sale companies, but these up-front investments coupled with long-term returns delays the revenue and profits. It’s better to target those who appreciate the long-term value of your product and see it as an investment in good quality. For the vast majority of the businesses you’ll see on our marketplace, SDE makes the most sense. Next-level documentation is an integral key to making your SaaS business more attractive, especially for the majority of buyers who will not be tech-savvy. While Health IT definitely has its share of high multiple companies like HealthEquity and Teladoc, the vast majority of publicly-traded HIT SaaS companies trade in the 3x to 5x revenue multiple ranges. Using the y-intercept as a measure, at a 0% growth rate, a SaaS company can expect to trade at 2.8x revenue. On the other hand, generalist Enterprise software companies like Salesforce or Intuit tend to trade higher in the 5x to 7x revenue multiple ranges. As we often do we’re leaning today on the data compiled by the Bessemer Cloud Index, which tracks the number of public companies that work in the cloud space.

Data released by venture capital firm Redpoint Ventures show that from 2004 to 2009 the average revenue growth for SaaS companies was around 25 percent. We’ve excluded non-SaaS companies from our analysis, and admittedly there is a prevalence of site and perpetual license models in Health IT as compared to other industries due to a legacy preference for non-hosted protected health data. In order for SaaS companies to maintain profitable, accelerated growth, they must consistently generate higher recurring revenues (MRR) from the same subscriber base. Transactions in the SaaS industry are growing in volume by c. They will be able to calculate your SDE accurately from your gross profit and advise on the applicable multiple based on their assessment of the business and previous transactions. McConnell says $1b of those transactions have taken place over the past 12 months. From 2010, SaaS companies started reinvesting about 50 percent of their profits in growth, and as a result, average growth rates have increased to 35 percent in the past three years.