Recently some of our portfolio companies put in place credit facilities (debt) in order to provide a cushion against cash shortfalls. At DAN Fund, we’re not opposed to debt at all as long as the terms are attractive, but we decided to look at how the publicly traded SaaS players use debt to get a benchmark for where we should be. In conclusion, they don’t use much debt at all and you probably shouldn’t either. Observations on how the 40 company data set uses debt are below.
-The big boys use very little if any debt. 16 of the 40 companies have no debt at all and on median, the total amount of debt outstanding is only $7mm. Given that that median enterprise value of these businesses is $1.1bln and median revenue is $252mm, that’s a negligible level of debt.
-LinkedIn and Salesforce use a lot of debt and stand out as outliers. LinkedIn has $1.1bln in debt for a business with $2.9bln of LTM revenue (2.6x revenue/debt) and Salesforce has $2bln of debt for a company with $6.3bln in revenue (3.1x revenue/debt). Removing these two outliers takes the average debt of the 40 company data set from $156mm to $80mm. For further comparison, the median revenue/debt multiple for the entire data set is a paltry 38.8x whereas these two companies are at 2.6x and 3.1x respectively.
So why aren’t publicly traded SaaS business using more debt? The reason seems to be that these business don’t generate enough cash to comfortably service lots of debt. For instance, the median EBITDA of the data set is -$9mm so these businesses on median are not profitable. The median free cash flow of the data set is $21mm thanks largely to deferred revenue so when looking at the median FCF/Debt, the figure is a much more reasonable 3.2x. Indeed both Salesforce and LinkedIn throw off a lot of cash so their debt is understandable.
In conclusion, the lesson seems simple enough: if you’re burning cash or not generating much of it, use debt sparingly if at all. You should absolutely have a credit facility in place as a backstop to running low on cash in a particular month, but don’t lean on it as a consistent source of capital.
The dataset can be found at the link below.