Vertical SaaS is getting substantially higher valuations

Recently we got our hands on Meridian Capital’s Spring 2017 SaaS M&A Update.  It’s a very well done analysis of the SaaS M&A market.  In this particular edition, one trend stood out to me: Vertical SaaS is earning a significant valuation premium to Horizontal SaaS.   Vertical SaaS is a SaaS company that focuses on customers in a specific sector such as healthcare or media.  Horizontal SaaS is a SaaS company that will sell to anyone in any sector.  A good example is Salesforce or Hubspot.  The analysis highlights customer acquisition cost as the reason Vertical SaaS trades at a premium to Horizontal SaaS.

 

“Vertical-focused SaaS companies have become increasingly more attractive targets as companies are realizing the increased benefits of specialization. Due to a targeted customer base, vertical SaaS companies can realize 8x cheaper customer acquisition costs than typical horizontal SaaS platforms. Further, companies are more easily able to adapt to the demands of its user-base, developing tailored features for a specific industry. Ultimately, this flexibility translates into decreased churn and the ability for further upsell opportunities with its current customer base.”

 

As a result, “As of March 2017, the median vertically-focused public SaaS comp was trading at 6.8x revenue compared to 3.8x for horizontal SaaS (based on an index of representative companies).”  That’s a significant difference.  Below are the comps the analysis used for Horizontal SaaS. 

 

 

Below are the comps used for the analysis of Vertical SaaS.

 

 

In summary, those SaaS businesses that have the luxury of focusing on particular customers in a specific sector will realize lower churn, better upsell, better EBITDA margins (14% versus -2%), lower customer acquisition costs, and as a result command a significantly higher valuation premium.  In other words, specialize if you can.  Big thanks to Meridian Capital for compiling the analysis and sharing it publicly.  

Blossom Street Ventures. All Rights Reserved.
Web Site Design by Idealgrowth