A great measure of cash efficiency: R/D+E

At DAN Fund we’re always trying to find new ways to look at data and measure performance.  The question was posed: how much revenue should I be generating per dollar of investment? It’s a great question that drives at the heart of cash efficiency, which as we all know is becoming as important as growth in this environment. 

 

To answer this question, we dove into the financials of the 40 publicly traded SaaS businesses we follow and looked at the ratio of annual revenue to debt plus equity invested (total investment) or in other words R/(D+E).  Indeed like the stratups we look at, many of these companies are not profitable as the median EBITDA margin is -9%, so revenue is the appropriate income statement metric to put in the numerator.  Findings were as follows:

 

  • Of the 40 comps, the average and median revenue per dollar of investment is $0.64 and $0.57 respectively.  Keep in mind these figures are for more mature public companies, so as a fast growing private company, your goal needs to be to quickly beat these measures by the time you’ve done the Series A (generally generating revenue for 18-24 months).  Admittedly some of our portfolio companies are not beating these ratios, whereas some are, which makes me think the metric is relevant.    

  • The businesses with higher revenue to total investment ratios enjoyed premium revenue multiples.  For instance, for those business with revenue to investment ratios greater than $1.00, the median revenue multiple is 5.49x whereas for the entire data set, the median revenue multiple is 4.11x. 

 

While this measure is imperfect, it’s the best proxy we have using accurate, public data to answer the question of how much revenue should a company be generating annually for each dollar of investment.   My data can be found at the link below, all of which is taken from CapitalIQ. 

https://www.dropbox.com/s/uzqatwygmtw3yx3/SaaS%20Comps%20-%20%20DAN%20Fund%20v7.xlsx?dl=0

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