When I worked in venture capital, I was lucky enough to have the opportunity to invest in some really great companies during their early rounds. Now some of those companies are going public, and I find myself spending some time thinking about when to sell my stock in these companies.
I don’t think anyone has truly figured out the formula to value these companies. There just aren’t enough examples of SaaS companies that have reached maturity and shown us what they really look like in the long term. Salesforce still grows at 23% annually and trades at over 100x EBITDA!
Nonetheless, I thought it’d be an honest exercise for me to write some thoughts down and then review them in a few years.
I think that growth should be the number one factor in considering SaaS valuations (when I say valuation, I mean how much is the company worth on a revenue/gross profit/EBITDA/FCF multiple basis). If a company can grow at 50% for 3 years, it’s topline will be nearly 3.4x higher! That’s powerful.
If you’re a real SaaS company, this means you have 80+% gross margins and should start seeing nearly 40 cents/dollar of new revenue start to fall down to operating cash flows. Assuming the company that grows at 50% annually was cash flow breakeven, that means your operating cash flow in three years is more than your current revenues.
No two companies are the same. The top factors that would effect valuation are how scalable growth is (sales/marketing channels and economics), how long growth can go for (market size, competition), churn (and how it contributes to growth), and margin profile (gross and net), barriers to entry (that will protect current revenues and make sure new competition doesn’t chip into existing growth prospects)…there are some other things pretty important too, like management’s incentive system.
I think what a lot of investors have figured out is that if a company keeps growing, you can pay through the nose (relative to what most companies trade at) and still make a nice IRR. I agree that growth is the most important aspect of valuation, and that most of the other factors are basically contributors to growth. Even in these heady times of crazy valuations, I’d say that a lot of the public companies are undervalued! The other main factor here is the margin profile. If you can’t ever be profitable, then forget it. And, in the case SaaS companies, it’s more like you have to be VERY profitable.
I don’t have time to look up various rules on making stock predictions for companies you own. So, I’ll leave you with this very basic spreadsheet (SaaS valuations thoughts) that should illustrate that growth is key in valuation and how I think various companies should be valued (although I guess the numbers in blue are very much up to interpretation in most companies). Enjoy.
Hello to every body, it’s my first pay a visit of this webpage;
this blog includes amazing and truly good stuff for visitors.
Fantastic beat ! I would like to apprentice while you amend your website, how can i subscribe for a blog website?
The account helped me a acceptable deal. I had been a little
bit acquainted of this your broadcast provided bright clear concept
Hey! I just wanted to ask if you ever have any trouble with
hackers? My last blog (wordpress) was hacked
and I ended up losing a few months of hard work
due to no data backup. Do you have any solutions to
protect against hackers?
Admiring the persistence you put into your blog and in depth information you offer.
It’s nice to come across a blog every once in a while that
isn’t the same out of date rehashed information. Excellent read!
I’ve bookmarked your site and I’m adding your RSS feeds to my Google
account.
Have you ever considered about including a little bit more than just your articles?
I mean, what you say is valuable and everything. But just imagine if
you added some great visuals or video clips to
give your posts more, “pop”! Your content is excellent but with images and videos, this blog could certainly be one of the best in its
field. Great blog!
Hello There. I found your weblog the usage of msn. This
is an extremely smartly written article. I’ll be sure
to bookmark it and return to learn more of your helpful information. Thank you for the
post. I will certainly return.
Woah! I’m really loving the template/theme of this site.
It’s simple, yet effective. A lot of times it’s challenging to get that
“perfect balance” between usability and appearance.
I must say you’ve done a superb job with this. In addition, the blog loads extremely fast for me on Safari.
Outstanding Blog!
At this time it looks like Movable Type is the best blogging platform out there right now.
(from what I’ve read) Is that what you are using on your blog?
I could not refrain from commenting. Exceptionally well written!
I am actually thankful to the owner of this website who has shared
this impressive paragraph at here.
I’m not sure why but this web site is loading very slow for me.
Is anyone else having this issue or is it a issue on my end?
I’ll check back later on and see if the problem still exists.
Just want to say your article is as astounding.
The clearness to your post is simply excellent and i can assume you are a professional
on this subject. Fine with your permission let me to snatch
your RSS feed to keep up to date with imminent post.
Thanks one million and please keep up the gratifying
work.
I’m no longer sure the place you’re getting your info, however good topic.
I must spend a while learning much more or working out
more. Thank you for great info I was on the lookout for this info for my mission.
Today, while I was at work, my cousin stole my apple ipad and
tested to see if it can survive a 25 foot drop, just so
she can be a youtube sensation. My iPad is now destroyed and she has 83 views.
I know this is entirely off topic but I had to share it with someone!
After going over a few of the blog posts on your site,
I really appreciate your technique of writing a blog.
I bookmarked it to my bookmark website list and will be checking back soon. Take a look at my website too and tell me what you think.
I’m not that much of a online reader to be honest but your blogs really nice, keep
it up! I’ll go ahead and bookmark your site
to come back down the road. Many thanks
I really love your blog.. Great colors & theme. Did you create
this site yourself? Please reply back as I’m attempting
to create my own website and would love to learn where you got this from or
what the theme is called. Appreciate it!
Do you mind if I quote a couple of your articles as long as I provide credit
and sources back to your site? My website is in the very same area of interest as yours and my users would truly benefit from a lot of the information you present here.
Please let me know if this okay with you. Cheers!
It’s truly a great and useful piece of info. I am glad that you simply shared this helpful information with us.
Please stay us up to date like this. Thanks for sharing.
Peculiar article, totally what I was looking for.
Do you have a spam issue on this site; I also am a blogger,
and I was wondering your situation; many of us have created some nice practices and we are looking to swap solutions with
others, be sure to shoot me an email if interested.
It’s enormous that you are getting thoughts from this
paragraph as well as from our argument made
at this time.
Greetings! Very useful advice in this particular article!
It’s the little changes that will make the largest changes.
Many thanks for sharing!
What a material of un-ambiguity and preserveness of precious know-how concerning unexpected
emotions.
An interesting discussion is worth comment. I think that you should write more
about this topic, it may not be a taboo subject but typically
people do not speak about these subjects. To the next!
Many thanks!!
I am in fact grateful to the holder of this web page who has shared
this wonderful piece of writing at at this place.
I do not know if it’s just me or if everyone else experiencing issues with your site.
It looks like some of the text in your posts
are running off the screen. Can someone else please provide feedback and let
me know if this is happening to them too? This may be a
problem with my browser because I’ve had this happen previously.
Kudos
If you wish for to increase your familiarity just keep visiting
this website and be updated with the latest gossip posted here.
Right here is the perfect web site for anybody who hopes to find
out about this topic. You realize a whole lot
its almost hard to argue with you (not that I really would want to…HaHa).
You certainly put a fresh spin on a topic that has been written about for years.
Great stuff, just great!
Hi it’s me, I am also visiting this site daily, this web page is in fact nice and the users are in fact sharing good thoughts.
In fact no matter if someone doesn’t understand then its up to other viewers that
they will assist, so here it occurs.
Can you tell us more about this? I’d want to find out
more details.
Greetings! I know this is kinda off topic however I’d figured I’d ask.
Would you be interested in exchanging links or maybe guest
authoring a blog post or vice-versa? My website goes over a lot of the same topics as yours and I believe we could greatly benefit
from each other. If you’re interested feel free to send me an email.
I look forward to hearing from you! Superb blog by the way!
I love what you guys are up too. This type of clever work
and coverage! Keep up the awesome works guys I’ve included you guys to my personal blogroll.
Ahaa, its fastidious dialogue regarding this article here
at this blog, I have read all that, so at this time me also commenting here.
It’s very simple to find out any matter on net as compared to books, as I found this paragraph at this web site.
It’s very effortless to find out any matter on net as compared to textbooks, as I found this piece of writing at this web
site.
Thank you for sharing your info. I really
appreciate your efforts and I am waiting for your further write
ups thank you once again.
Your style is so unique in comparison to other folks I have read
stuff from. Many thanks for posting when you have the opportunity,
Guess I’ll just book mark this site.
Outstanding post however , I was wondering
if you could write a litte more on this topic? I’d be very thankful if you could elaborate a little bit more.
Thanks!
Remarkable! Its actually awesome article, I have got much clear
idea concerning from this piece of writing.
You’re so interesting! I don’t suppose I have read a single thing like that before.
So good to find another person with some original thoughts on this subject matter.
Really.. thank you for starting this up. This website is
something that’s needed on the web, someone with a little
originality!
Hello to all, how is the whole thing, I think every one is getting more from this website, and your views are good designed for new viewers.
I like it when individuals come together and share thoughts.
Great site, keep it up!
you are truly a just right webmaster. The website
loading pace is amazing. It sort of feels that you’re doing any distinctive trick.
In addition, The contents are masterpiece. you’ve performed
a wonderful activity on this subject!
Oh my goodness! Amazing article dude! Thank you, However I am experiencing problems with your RSS.
I don’t know the reason why I cannot join it. Is there anyone else getting
identical RSS issues? Anyone who knows the
answer will you kindly respond? Thanx!!
Why viewers still use to read news papers when in this technological
world all is existing on net?
Having read this I believed it was rather informative.
I appreciate you spending some time and energy to put
this informative article together. I once again find myself
personally spending a significant amount of time both reading and leaving
comments. But so what, it was still worth it!
Nice blog right here! Also your web site so much up very fast!
What web host are you the usage of? Can I am getting your affiliate link in your host?
I want my website loaded up as quickly as yours lol
Good write-up. I certainly appreciate this website. Stick with it!