At DAN Fund we monitor 40 publicly traded SaaS companies to get a sense of where revenue multiples are trading (Bessemer does the same thing and inspired us to do it). We use these multiples to determine valuations for SaaS companies at the Series A level. While using the multiples of publics to determine the valuation of private companies is an imperfect and arguably flawed methodology, it’s the best available because M&A multiples for private companies tend to be unavailable or totally inaccurate/inflated when they are available.
Whether you agree with our approach or not, one thing is undisputable: multiples for SaaS businesses have collapsed in the past year. In Q4 of 2014, the mean and median multiple for the 40 SaaS companies we monitor was 8.08x and 7.60x respectively. In Q4 of 2015, for the same set of companies, the multiples are 4.93x and 4.32x. That is a massive decline, and all the VC that have been investing in SaaS business at 10x to 15x revenue for the past year have even more explaining to do to justify their valuations.
Making the news even worse, the data set DAN Fund monitors isn’t complete: of the 40 companies we monitor, 15 of them have not reported Q4 2015 figures, so we’re still using Q3 2015’s inflated figures for their multiples. To give you a sense, in Q3 of 2015, the mean and median revenue multiples were 6.61x and 7.72x respectively. If we remove those 15 that haven’t yet reported, then the multiples for the 25 SaaS businesses that remain worsens to 4.09x and 4.07x respectively.
So what does this mean for companies trying to raise money? A few things: if you haven’t been operating the business for profitability and you’re therefore forced to raise, you may need to adjust your valuation expectation. If you have been operating your business profitably, it may behoove you to wait out the market and see if $30 oil and an S&P down 10% YTD improves. This is the analysis that VC do and it’s going to make them take pause at the extreme multiples which were commonplace in 2015. My spreadsheet showing the multiples is at the link below.