Posted on by Phil

Some thoughts on valuing SaaS companies

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.

10,288 Replies to “Some thoughts on valuing SaaS companies”

  1. I like the helpful info you provide in your articles.
    I will bookmark your blog and check again here regularly.
    I’m quite sure I will learn many new stuff right here!
    Good luck for the next!

  3. hi!,I really like your writing so much! proportion we keep
    in touch extra approximately your post on AOL? I require a specialist in this space
    to unravel my problem. Maybe that is you! Having a look forward to see you.

  5. What’s up mates, how is the whole thing, and what you wish for to say on the topic
    of this post, in my view its in fact amazing designed for me.

  6. Somebody essentially help to make significantly posts I’d state.
    That is the first time I frequented your web page and up to now?
    I amazed with the research you made to make this particular publish amazing.
    Excellent task!

  8. I loved as much as you will receive carried out right here.

    The sketch is attractive, your authored subject matter stylish.
    nonetheless, you command get bought an edginess over that
    you wish be delivering the following. unwell unquestionably come further formerly again as exactly the same nearly very often inside case you shield this hike.

  10. I loved as much as you will receive carried out right here.
    The sketch is tasteful, your authored subject matter stylish.
    nonetheless, you command get got an edginess over that you wish be delivering the following.
    unwell unquestionably come more formerly again since exactly the same nearly a lot often inside case you shield this hike.

  17. If some one wants to be updated with newest technologies after that he must be visit this web site and be up to date every day.

  19. Hey There. I found your blog using msn. This is a really well
    written article. I will be sure to bookmark it and come back
    to read more of your useful information. Thanks for the post.
    I’ll definitely return.

  20. I do not even know how I ended up here, but I thought this post was great.
    I don’t know who you are but definitely you’re going to a famous blogger if you aren’t
    already 😉 Cheers!

  22. Howdy this is somewhat of off topic but I was wanting to know if blogs
    use WYSIWYG editors or if you have to manually code with HTML.
    I’m starting a blog soon but have no coding experience so I wanted to get
    guidance from someone with experience. Any help would be enormously appreciated!

  24. Hello, i think that i saw you visited my website thus i came to “return the favor”.I am trying to find things to improve my website!I suppose its
    ok to use some of your ideas!!

  26. Hi there would you mind stating which blog platform you’re using?
    I’m looking to start my own blog soon but I’m having a hard time
    making a decision between BlogEngine/Wordpress/B2evolution and Drupal.
    The reason I ask is because your design and style seems different
    then most blogs and I’m looking for something completely unique.
    P.S Sorry for being off-topic but I had to ask!

  29. magnificent submit, very informative. I wonder why the opposite experts of this sector do not
    realize this. You must proceed your writing. I’m confident,
    you’ve a great readers’ base already!

  33. whoah this weblog is fantastic i really like studying your posts.
    Keep up the great work! You realize, lots of persons are looking
    around for this info, you can help them greatly.

  35. I do not even know the way I stopped up here, however I thought this put up was great. I do not realize who you’re but certainly you’re going to a well-known blogger if you are not already. Cheers!|

  36. Good post however , I was wanting to know if you could write a litte more on this subject? I’d be very thankful if you could elaborate a little bit further. Kudos!|

  37. Hey I know this is off topic but I was wondering if you knew of any widgets I could add to my blog that automatically tweet my newest twitter updates. I’ve been looking for a plug-in like this for quite some time and was hoping maybe you would have some experience with something like this. Please let me know if you run into anything. I truly enjoy reading your blog and I look forward to your new updates.|

  38. Hello there, You have done a great job. I’ll certainly digg it and personally
    suggest to my friends. I am sure they’ll be benefited from this
    web site.

  39. Hey I am so glad I found your weblog, I really found you by mistake, while I was looking on Google for
    something else, Regardless I am here now and would just like to say cheers for a marvelous
    post and a all round enjoyable blog (I also love the theme/design), I don’t have
    time to look over it all at the moment but I have saved it and
    also included your RSS feeds, so when I have time I will be back to read a great deal more, Please do keep up the superb
    job.

  40. ⋆ CHEAPEST INSTAGRAM SERVICES ⋆ We’re offering cheapest Instagram & ALL social media services.

    Trusted by business owners and influencers.
    Over 6000+ services on our website Link in bio.

    ★ Instagram Followers CHEAPEST GUARANTEED!
    ★ Instagram Likes CHEAPEST GUARANTEED!
    ★ Instagram Views/Reels/TV CHEAPEST GUARANTEED!
    ★ Instagram Story Views CHEAPEST GUARANTEED!
    ★ Instagram SUPER Impression CHEAPEST GUARANTEED!
    ★ Spotify Plays CHEAPEST GUARANTEED!
    ★ YouTube Ads Views CHEAPEST GUARANTEED!
    ★ Facebook Photo / Post Likes CHEAPEST GUARANTEED!
    ★ FB Page Likes CHEAPEST GUARANTEED!
    ★ Tik Tok Views CHEAPEST GUARANTEED!
    USA Targeted Services for Instagram!!

    ☆ 1M Instagram Followers $2500 Only
    ☆ Lifetime support / Refill.
    ☆ $1 FREE to all new customers to test our services!

    Our services are incredibly cheap & effective!
    With us you have 100% privacy.
    ⋆ Whatsapp +1(619)752-3332 ⋆
    Order Online: https://bit.ly/massdm1

  43. Heya i am for the primary time here. I came across this board and I find It really useful &
    it helped me out a lot. I’m hoping to provide one thing
    back and help others such as you aided me.

  45. Hello, i believe that i noticed you visited my web site
    thus i came to go back the want?.I’m trying to in finding issues to enhance my site!I suppose its adequate
    to make use of a few of your ideas!!

  49. So empfehlen sich Teleskoprampen beispielsweise in Kellerbereichen für den Transport von Fahrrädern oder auch zur Überbrückung von Stufen und
    Treppen durch Rollstuhlfahrer. Unter anderem können sie im
    Behindertentransport und Krankentransport verwendet werden, um beispielsweise die Rollstühle mit den Patienten in den Krankenwagen oder ein anderes Fahrzeug zu
    transportieren. Dies ist dann mithilfe der betreffenden Teleskoprampen ganz ohne
    Tragen möglich. Flächenrampen haben gegensätzlich den Schienenrampen den Vorteil, dass eine Begleitperson hiermit Rollstuhlfahrer zusammen über die
    Rampe gehen kann. I. a. sind sie einfacher
    in der Handhabung, da sie problemlos zu platzieren sind.
    Die Schienenrampen überzeugen hingegen durch ihr geringes Gewicht, wodurch sie sich erst recht zum Mitnehmen eignen. Oftmals sind Schienenrampen zugleich teleskopierbar und portabel.

    Mobile oder stationäre Rampe? Eine stationäre Rampe ist fest montiert
    und wird immer am selben Ort genutzt. In den meisten Fällen sind stationäre Rampen gleichzeitig Flächenrampen. Bei mobilen Rampen kann es sich um Schienen nebst
    Flächenrampen handeln.

  50. Hello mates, how is everything, and what you desire to say regarding this piece of writing, in my view its in fact amazing in favor of me.

Comments are closed.