Raising a lot of money is not the only way to big revenue

Private sector tech companies have been raising staggering amounts of money (looking at you Uber, Airbnb, Cloudera) which poses the question: is raising a lot of money the only way to grow? The answer is no.  We did an analysis of 45 publicly traded tech SaaS companies looking at their annual revenue, total debt and equity to get a sense for capital raised, and free cash flow.  In conclusion, there are two ways to grow: i) the expensive way which is to raise a lot of money and suffer the dilution; or ii) the efficient way which is to generate free cash flow so the business can grow off re-invested profits.  The raw data set is at the following link and observations are below.

 

https://www.dropbox.com/s/ksmy2s3l6gdpjck/Article%20%20FCF%20compared%20to%20Capital%20Raised.xlsx?dl=0

 

-As expected, the largest companies by revenue (Salesforce is the biggest at $6.3bln) both have raised the most cash and generated the most free cash flow on which to grow the business with re-invested profits.  The table below summarizes the 45 companies into 5 silos based on revenue.  It then shows the average rank of each for free cash flow generated and Debt+Equity (a proxy for capital raised).  For instance, of the top 9 companies by revenue, on average they ranked 8th for annual free cash flow generated and 7th for total capital raised.  The table is showing us what we would expect: those companies that have raised the most money and have the most free cash flow are the largest by revenue. 

 

Average Rank by Revenue

FCF

Debt+Eq

Top 9 in Revenue

8

7

10 through 18

20

18

19 though 27

21

24

28 through 35

30

32

36 through 45

36

33

 

 

-Where the data gets interesting is when we look at each of the top 20 companies by revenue (click on the link above to see the detail).   9 of the top 20 rank similarly for the amount of cash raised and amount of free cash flow generated, which is in line with the table above.  But more interestingly,  6 of the top 20 rank much higher in free cash flow than they do in capital raised (meaning they grew the efficient way; highlighted in green below), and 5 of the top 20 rank much higher in capital raised than they do in free cash flow generated (meaning they grew the expensive way, highlighted in pink below).  For instance, The Ultimate Software Group with $618mm in annual revenue ranks 7th in free cash flow generated, at $111mm last year, but they rank 19th in capital raised.  They grew the efficient way.  Similarly, Atlassian Corp with $387mm in revenue ranked 9th in free cash flow generated, at $100mm, but ranked 20th in total capital raised.   Again, efficient growth with less capital raised. 

 

                   

Capital

   

TTM

TTM

TTM

Capital

 

Capital

 

FCF

Raised

Name

Ticker

Revenue

EBITDA

FCF

Surplus

Debt

Raised

 

Rank

Rank

salesforce.com, Inc.

CRM

$6,300

$400

$1,610

$5,410

$2,060

$7,470

 

1

1

LinkedIn Corp.

LNKD

$2,990

$237

$806

$4,589

$1,130

$5,719

 

2

2

WorkDay, Inc.

WDAY

$1,070

-$164

$259

$2,157

$508

$2,665

 

4

3

ServiceNow, Inc.

NOW

$1,010

-$106

$315

$1,141

$475

$1,616

 

3

4

Athenahealth, Inc.

ATHN

$925

$61

$164

$522

$298

$820

 

5

8

NetSuite Inc.

N

$741

-$67

$100

$992

$278

$1,270

 

8

6

The Ultimate Software

ULTI

$618

$65

$111

$464

$9

$473

 

7

19

Splunk, Inc.

SPLK

$596

-$247

$156

$1,429

$0

$1,429

 

6

5

Lifelock

LOCK

$587

$45

-$4

$532

$0

$532

 

32

14

RealPage, Inc.

RP

$469

$55

$93

$457

$40

$497

 

10

16

Medidata Solutions, Inc.

MDSO

$393

$40

$87

$350

$253

$603

 

12

12

Atlassian Corporation

TEAM

$387

$16

$100

$460

$0

$460

 

9

20

Veeva Systems Inc.

VEEV

$382

$91

$75

$348

$0

$348

 

14

27

Cornerstone

CSOD

$340

-$51

$44

$378

$233

$611

 

17

11

Secureworks

SCWX

$317

-$52

-$10

$616

$28

$644

 

37

10

RingCentral, Inc.

RNG

$296

-$16

$5

$306

$19

$325

 

26

32

Fleetmatics Group PLC

FLTX

$285

$68

$92

$313

$28

$341

 

11

29

Box, Inc.

BOX

$280

-$162

-$87

$855

$47

$902

 

44

7

IntraLinks Holdings

IL

$276

$28

$31

$453

$83

$536

 

18

13

LogMeIN, Inc.

LOGM

$272

$35

$86

$277

$60

$337

 

13

31

Proofpoint, Inc.

PFPT

$265

-$61

$46

$441

$346

$787

 

16

9

Demandware, Inc.

DWRE

$237

-$18

$15

$426

$0

$426

 

23

21

Marketo, Inc.

MKTO

$210

-$55

$2

$336

$3

$339

 

29

30

Zendesk, Inc.

ZEN

$209

-$62

$5

$485

$0

$485

 

25

18

Shopify

SHOP

$205

-$12

$16

$243

$0

$243

 

22

37

Wix.com Ltd.

WIX

$204

-$44

$21

$167

$0

$167

 

20

44

Bazaarvoice, Inc.

BV

$197

-$18

$3

$429

$58

$487

 

27

17

Jive Software, Inc.

JIVE

$196

-$19

$0

$381

$4

$385

 

30

23

Cvent, Inc.

CVT

$188

$16

$27

$212

$0

$212

 

19

41

Benefitfocus, Inc.

BNFT

$185

-$45

-$32

$310

$65

$375

 

41

25

HubSpot, Inc.

HUBS

$182

-$39

$0

$323

$1

$324

 

31

33

Qualys, Inc.

QLYS

$164

$39

$66

$215

$0

$215

 

15

40

New Relic, Inc.

NEWR

$162

-$53

$3

$382

$0

$382

 

28

24

SPS Commerce, Inc.

SPSC

$159

$17

$14

$265

$0

$265

 

24

36

2U

TWOU

$150

-$19

-$9

$217

$0

$217

 

36

39

MobileIron, Inc.

MOBL

$149

-$79

-$49

$343

$0

$343

 

42

28

Five9, Inc.

FIVN

$129

-$14

-$13

$177

$47

$224

 

38

38

Hortonworks, Inc.

HDP

$122

-$175

-$99

$500

$0

$500

 

45

15

Marin Software, Inc.

MRIN

$109

-$20

-$7

$276

$3

$279

 

34

35

Mindbody, Inc

MB

$101

-$28

-$19

$270

$16

$286

 

39

34

Textura

TXTR

$87

-$4

$20

$353

$0

$353

 

21

26

Castlight Health, Inc.

CSLT

$75

-$78

-$57

$410

$0

$410

 

43

22

Appfolio, Inc.

APPF

$75

-$9

-$7

$142

$0

$142

 

33

45

Instructure

INST

$73

-$50

-$19

$189

$0

$189

 

40

42

Xactly

XTLY

$71

-$14

-$7

$151

$16

$167

 

35

43

 

In conclusion, there are two ways to grow a business: the expensive way which means raising lots of money and suffering founder dilution, or the efficient way which means building a business that throws off plenty of cash so you can grow with re-invested profits.   Don’t be lulled into the idea that growth can only be achieved by raising lots of money.  

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