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 there, I believe your website could be having browser compatibility issues.
Whenever I take a look at your blog in Safari,
it looks fine however, when opening in IE, it has some overlapping issues.
I merely wanted to give you a quick heads up! Other than that, fantastic
blog!
We will teach you how to earn $ 7000 per hour. Why?
We will profit from your profit.https://go.binaryoption.ae/FmUKhe
I love looking through an article that will make men and women think.
Also, thank you for permitting me to comment!
Spot on with this write-up, I seriously think this website needs much more attention. I’ll probably be
returning to read through more, thanks for the info!
Good article. I certainly appreciate this site. Continue the good work!
Good day! Do you know if they make any plugins to
help with Search Engine Optimization? I’m trying to get my blog to rank for some
targeted keywords but I’m not seeing very good success.
If you know of any please share. Cheers!
I every time spent my half an hour to read this webpage’s posts every day
along with a mug of coffee. http://pointded.com
Hello there, You have done a great job.
I will certainly digg it and personally suggest to my friends.
I’m sure they’ll be benefited from this site.
I do not know whether it’s just me or if everyone else
experiencing problems with your website. It seems like
some of the written text in your posts are running off the
screen. Can somebody else please provide feedback and let me
know if this is happening to them as well? This might be a problem with my web browser because I’ve had this happen previously.
Appreciate it
We are a group of volunteers and opening a new scheme in our community.
Your website offered us with valuable information to work on. You have done a formidable job
and our whole community will be thankful to you.
Hi would you mind stating which blog platform you’re working with?
I’m going to start my own blog in the near future but I’m having
a hard time deciding between BlogEngine/Wordpress/B2evolution and Drupal.
The reason I ask is because your design seems different then most
blogs and I’m looking for something completely unique.
P.S Apologies for getting off-topic but I had to ask!
I’m not that much of a internet reader to be honest
but your sites really nice, keep it up! I’ll go ahead and bookmark your site to come back later on. Cheers
Remarkable issues here. I’m very happy to peer your article.
Thank you so much and I am having a look ahead to contact you.
Will you kindly drop me a mail?
I love reading through a post that will make people think.
Also, many thanks for allowing me to comment!
It’s awesome to pay a visit this site and reading the views of all friends regarding
this post, while I am also keen of getting knowledge.
Wonderful site. Lots of helpful information here.
I am sending it to a few buddies ans additionally sharing
in delicious. And naturally, thanks for your effort!
I’m really impressed with your writing skills as
well as with the layout on your blog. Is this a paid theme or did you modify it yourself?
Anyway keep up the nice quality writing, it’s rare
to see a great blog like this one these days.
This is very interesting, You’re an overly professional blogger.
I have joined your rss feed and look forward to seeking more of
your magnificent post. Additionally, I have shared your website in my social
networks
I think this is one of the most vital info for me. And i’m glad reading
your article. But wanna remark on some general things, The
website style is perfect, the articles is really excellent : D.
Good job, cheers
That is very fascinating, You’re a very professional blogger.
I’ve joined your feed and stay up for looking for extra of your
magnificent post. Additionally, I’ve shared your website in my social networks
Why users still make use of to read news papers when in this technological
world all is accessible on web?
Write more, thats all I have to say. Literally, it seems as though you relied on the video to make your point.
You obviously know what youre talking about, why waste your intelligence
on just posting videos to your site when you could be giving us something informative to read?
Hello colleagues, how is all, and what you want to say concerning this
article, in my view its actually remarkable in support of me.
Greetings from Carolina! I’m bored to death at work so I decided to
check out your website on my iphone during lunch
break. I love the information you present here and can’t wait to
take a look when I get home. I’m amazed at how fast your
blog loaded on my phone .. I’m not even using WIFI, just 3G
.. Anyways, superb site!
I’m curious to find out what blog platform you’re using?
I’m having some minor security problems with my latest blog and I’d like
to find something more risk-free. Do you have any suggestions?
You really make it seem really easy with your
presentation however I find this topic to be actually one thing that I think
I would by no means understand. It sort of feels too complicated and extremely large for
me. I’m taking a look ahead on your next submit, I will try to get the dangle of it!
What’s up everybody, here every one is sharing these kinds of familiarity, therefore it’s pleasant to read this blog,
and I used to pay a quick visit this website daily.
certainly like your web site but you have to take a look at
the spelling on quite a few of your posts. Many of them are rife with spelling problems and I in finding
it very bothersome to tell the truth on the other hand I will surely come
again again.
I’m really enjoying the design and layout of your blog. It’s a very easy on the eyes which makes it
much more enjoyable for me to come here and visit
more often. Did you hire out a developer to create
your theme? Superb work!
When I originally commented I seem to have clicked the -Notify me when new comments are
added- checkbox and from now on each time a comment is added I receive
four emails with the exact same comment. Perhaps there is a way
you are able to remove me from that service? Thanks!
I think the admin of this website is truly working hard for his web page, since
here every material is quality based data.
I blog frequently and I seriously appreciate your content.
Your article has really peaked my interest. I will book mark your site and keep checking for new information about once a week.
I opted in for your Feed too.
Thanks to my father who informed me about this website,
this web site is genuinely awesome.
Spot on with this write-up, I seriously believe this web site needs much more attention.
I’ll probably be back again to read through more, thanks for the advice!
Everyone loves it when people come together and share thoughts.
Great blog, stick with it!
Hey there! I know this is kinda off topic but I’d figured I’d
ask. Would you be interested in exchanging links or maybe
guest authoring a blog article or vice-versa?
My site covers a lot of the same subjects as yours and I think we could greatly benefit from each other.
If you are interested feel free to send me an email.
I look forward to hearing from you! Great blog by the way!
Hello colleagues, how is everything, and what you want to say regarding
this piece of writing, in my view its really amazing for me.
Thanks to my father who shared with me on the topic of this weblog,
this blog is actually remarkable.
It’s a pity you don’t have a donate button! I’d definitely donate to this outstanding blog!
I suppose for now i’ll settle for bookmarking and adding your RSS feed to my Google account.
I look forward to new updates and will share this site with my Facebook
group. Chat soon!
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 website
to come back later on. Many thanks
Excellent post. I was checking continuously this blog and
I’m impressed! Very helpful information specifically the last part 🙂 I care for such information much.
I was looking for this certain information for a very long time.
Thank you and best of luck.
I love it whenever people come together and share views.
Great site, keep it up!
Excellent blog right here! Also your site lots up very fast!
What web host are you the use of? Can I get your affiliate link
on your host? I wish my web site loaded up as quickly as yours lol
Hey there! I know this is kind of off-topic but I needed to ask.
Does managing a well-established blog like yours require a massive amount work?
I’m completely new to writing a blog however I do write in my diary everyday.
I’d like to start a blog so I will be able to share my experience and feelings online.
Please let me know if you have any suggestions or tips for brand new aspiring
bloggers. Appreciate it!
I want to to thank you for this excellent read!! I absolutely loved every bit of it.
I have got you bookmarked to look at new
stuff you post…
obviously like your web site but you have to take a look at the spelling on quite a few of your posts.
Many of them are rife with spelling issues and I find it very troublesome to tell the truth then again I will definitely come back again.
It’s actually very complicated in this active life to listen news on Television,
therefore I only use web for that purpose, and get the most up-to-date news.
It’s going to be finish of mine day, however before end I am reading this enormous article to improve my knowledge.
Hi there to every single one, it’s really a nice for me
to visit this website, it contains priceless Information.
Hey there! This is my 1st comment here so I just wanted to give a
quick shout out and tell you I genuinely enjoy reading
your blog posts. Can you recommend any other blogs/websites/forums that deal with
the same subjects? Thank you!