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. Do you have a spam issue on this website; I also am a blogger, and I was wanting to know your
    situation; many of us have created some nice procedures and we are looking to swap
    techniques with others, please shoot me an e-mail if interested.

  2. Joy Кaзинo постоянно возвращает потраченные деньги.
    Частичный возврат средств способны активировать в большинстве случаев
    опытные посетители. Cashback
    можно забирать раз в месяц.
    Сумма кешбэка прописывается в
    специальной графе персонального кабинета.

  3. Undeniably believe that that you stated. Your favorite justification appeared to
    be at the internet the easiest thing to consider of.
    I say to you, I certainly get irked at the same time as folks think about
    issues that they plainly do not recognise about. You managed to hit the nail
    upon the highest and defined out the whole thing with no need side-effects
    , other people could take a signal. Will probably be again to get more.
    Thanks

  4. Howdy are using WordPress for your blog platform? I’m new to the blog world but I’m trying to get started and set up my own. Do you
    require any html coding knowledge to make your own blog?

    Any help would be greatly appreciated!

  8. Hi! This is my 1st comment here so I just wanted to give a quick shout out and say I
    truly enjoy reading through your posts. Can you suggest any
    other blogs/websites/forums that deal with the same topics?
    Thanks a ton!

  9. Hi, I do believe this is a great web site.
    I stumbledupon it 😉 I will come back yet again since i have bookmarked it.
    Money and freedom is the greatest way to change, may you be rich
    and continue to help others.

  10. Heya this is kind of 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 expertise so I wanted to get guidance from someone with experience.
    Any help would be enormously appreciated!

  11. Hey would you mind stating which blog platform you’re using?

    I’m looking to start my own blog in the near future but I’m having a tough time
    choosing between BlogEngine/Wordpress/B2evolution and Drupal.
    The reason I ask is because your layout seems different then most blogs and I’m looking for something unique.
    P.S Apologies for being off-topic but I had to ask!

  13. Great post. I was checking constantly this blog and I’m impressed!
    Very useful information particularly the last part 🙂 I care for such info a lot.
    I was looking for this certain information for a long time.
    Thank you and good luck.

  17. Hello there, You’ve done an excellent job. I will definitely digg it and personally recommend to my friends.
    I am confident they will be benefited from this website.

  21. Howdy, I do believe your site might be having internet browser compatibility issues.
    When I take a look at your web site in Safari, it looks fine however when opening in Internet Explorer, it’s got some overlapping issues.
    I simply wanted to provide you with a quick heads up! Apart from that, great blog!

  22. Good day! Do you know if they make any plugins to help
    with SEO? I’m trying to get my blog to rank for some targeted keywords but I’m not seeing very good gains.
    If you know of any please share. Thank you!

  24. you are actually a excellent webmaster. The website loading pace
    is amazing. It kind of feels that you are doing any unique trick.
    Also, The contents are masterpiece. you have done a magnificent
    activity in this topic!

  26. Aw, this was an exceptionally good post. Spending some
    time and actual effort to generate a good article… but what can I say… I put things off a whole lot and don’t manage to get nearly anything
    done.

  32. you are actuallʏ a eⲭcellent webmastеr. The web site lolading
    pace is amazing. It seems thst yyou are doing ɑny unique trick.
    Moreover, The contents are mastеrpiece. you’ve performed a magnificent task on tһis subject!

    Heеrе is my boog post :: boşanma avukatı

  34. Normally I do not learn article on blogs, but I wish to say
    that this write-up very compelled me to check out and do so!
    Your writing taste has been surprised me.
    Thank you, quite great article.

  37. Hi, I do believe this is a great blog. I stumbledupon it 😉 I
    am going to revisit yet again since I book-marked
    it. Money and freedom is the greatest way to change, may you be rich and continue to guide other people.

  43. I used to be recommended this web site via my cousin. I am
    no longer positive whether this post is written by means of him as
    nobody else understand such distinctive about my problem.
    You’re incredible! Thank you!

  44. Pretty nice post. I just stumbled upon your blog and wished to say that I have really enjoyed surfing around your blog
    posts. After all I will be subscribing to your feed and I hope you write again very soon!

  45. Hello there! This is kind of off topic but I need some help from an established blog.
    Is it hard to set up your own blog? I’m not very techincal but I can figure things
    out pretty fast. I’m thinking about creating my own but I’m not sure where to begin. Do you have any ideas or suggestions?

    Thanks

  48. It’s remarkable to visit this web page and reading the views of all friends
    about this piece of writing, while I am also eager of getting know-how.

  49. Do you mind if I quote a few of your articles
    as long as I provide credit and sources back to your website?
    My blog is in the very same niche as yours and my users would genuinely benefit
    from a lot of the information you provide here.
    Please let me know if this alright with you. Thanks a lot!

  50. 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.

Comments are closed.