The other way to earn a great multiple: generate cash

Everybody wants to have a SaaS business with recurring revenue contracted for a year or more.  Investors prefer this revenue stream to any other given the predictability and stickiness, especially if net retention of customers is high.  As result, SaaS businesses on average tend to enjoy higher valuation multiples than businesses that don’t have recurring revenue.   

 

As an entrepreneur looking to maximize valuation, the popularity of SaaS can be discouraging if your business does not lend itself well to a SaaS revenue model.  We’ve seen the desire to be a SaaS company cause founders to try and force their business to be a recurring revenue model, even though their business model isn’t naturally a SaaS business.   But, there is another way to earn a great multiple: generate real cash flow.  Not only will profitability/cash flow yield a strong valuation multiple, but businesses that generate cash don’t need to raise as much money to grow, thereby limiting dilution to founders.  Below we compare multiples and cash flow of SaaS and non-SaaS tech businesses.  

 

Looking at the 46 publicly traded SaaS businesses, we see that on median the trailing twelve-month revenue multiple is a lofty 6.16x, with a range of 4.41x to 7.50 over the last 7 quarters.  These businesses are growing 30% year over year on median which is attractive, but note the median EBITDA is -$16 million and median free cash flow is only $20 million.  These businesses are clearly commanding a strong 6.16x multiple because of the recurring nature of the revenue, not cash flow characteristics. 

    TTM TTM  TTM  Capital Enterprise Market         Q2 2016
Name Ticker Revenue EBITDA FCF Surplus Value Cap Debt Cash EV Calc   EV/Rev
2U TWOU $177 -$22 -$4 $356 $1,460 $1,670 $0 $188 $1,482   8.38x
Athenahealth, Inc. ATHN $1,010 $85 $171 $522 $5,150 $5,000 $295 $134 $5,160   5.11x
Bazaarvoice, Inc. BV $200 -$15 $19 $419 $259 $338 $42 $95 $286   1.43x
Benefitfocus, Inc. BNFT $212 -$36 -$35 $310 $1,300 $1,230 $75 $68 $1,237   5.82x
Box, Inc. BOX $327 -$156 -$38 $871 $1,400 $1,490 $56 $183 $1,363   4.16x
BroadSoft, Inc.  BSFT $314 $38 $64 $333 $1,200 $1,250 $195 $264 $1,180   3.77x
Castlight Health, Inc.  CSLT $82 -$77 -$58 $426 $219 $368 $0 $121 $247   3.01x
Cornerstone OnDemand, Inc. CSOD $389 -$52 $48 $394 $2,460 $2,470 $234 $267 $2,437   6.26x
Cvent, Inc.  CVT $211 $8 $46 $219 $1,140 $1,360 $0 $177 $1,183   5.60x
Five9, Inc.  FIVN $145 -$5 -$1 $181 $713 $722 $44 $58 $707   4.87x
Fleetmatics Group PLC FLTX $311 $67 $99 $321 $2,160 $2,330 $23 $194 $2,159   6.95x
Hortonworks, Inc. HDP $155 -$219 -$98 $519 $298 $571 $0 $109 $462   2.99x
HubSpot, Inc. HUBS $225 -$41 $11 $323 $1,930 $2,020 $1 $117 $1,904   8.47x
IntraLinks Holdings, Inc. IL $285 $14 $35 $456 $524 $490 $80 $39 $531   1.87x
Jive Software, Inc. JIVE $202 -$14 -$10 $384 $205 $312 $2 $108 $207   1.02x
Lifelock LOCK $632 $35 -$38 $532 $1,390 $1,590 $0 $156 $1,434   2.27x
LinkedIn Corp. LNKD $3,430 $396 $1,000 $4,589 $23,730 $25,660 $1,150 $3,310 $23,500   6.85x
LivePerson Inc. LPSN $232 $16 $36 $287 $360 $420 $0 $52 $368   1.58x
LogMeIN, Inc. LOGM $309 $37 $91 $277 $1,940 $2,090 $45 $225 $1,910   6.19x
Marin Software, Inc. MRIN $108 -$8 $5 $276 $69 $100 $2 $35 $67   0.61x
Marketo, Inc. MKTO $241 -$51 -$4 $345 $1,490 $1,580 $1 $100 $1,482   6.14x
Medidata Solutions, Inc. MDSO $421 $52 $96 $366 $2,950 $3,110 $256 $318 $3,048   7.24x
MobileIron, Inc. MOBL $158 -$65 -$35 $343 $177 $311 $0 $85 $226   1.43x
NetSuite Inc. N $846 -$59 $117 $993 $8,670 $8,740 $286 $408 $8,618   10.18x
New Relic, Inc. NEWR $202 -$61 $10 $347 $1,610 $1,800 $0 $196 $1,604   7.95x
Proofpoint, Inc. PFPT $313 -$60 $57 $441 $3,090 $3,130 $356 $412 $3,074   9.82x
Qualys, Inc. QLYS $182 $43 $75 $223 $912 $1,110 $0 $214 $896   4.93x
RealPage, Inc. RP $514 $68 $108 $472 $2,100 $2,010 $124 $47 $2,088   4.06x
RingCentral, Inc. RNG $339 -$9 $19 $320 $1,560 $1,690 $17 $148 $1,559   4.60x
salesforce.com, Inc.  CRM $7,070 $522 $1,930 $5,706 $55,030 $54,780 $2,070 $2,030 $54,820   7.75x
ServiceNow, Inc. NOW $1,190 -$91 $98 $1,141 $12,020 $12,380 $491 $807 $12,064   10.14x
Splunk, Inc. SPLK $729 -$291 $163 $1,529 $7,290 $8,330 $0 $1,020 $7,310   10.03x
SPS Commerce, Inc. SPSC $176 $18 $21 $265 $986 $1,120 $0 $128 $992   5.65x
The Ultimate Software Group, Inc. ULTI $700 $66 $120 $523 $6,000 $6,150 $10 $98 $6,062   8.66x
Veeva Systems Inc. VEEV $439 $87 $148 $362 $4,730 $5,240 $0 $457 $4,783   10.89x
Wix.com Ltd. WIX $241 -$45 $27 $193 $1,440 $1,580 $0 $128 $1,452   6.03x
WorkDay, Inc. WDAY $1,260 -$194 $328 $2,248 $14,790 $16,370 $514 $2,080 $14,804   11.75x
Zendesk, Inc. ZEN $261 -$78 $15 $512 $2,680 $2,890 $0 $224 $2,666   10.22x
Secureworks SCWX $362 -$57 -$18 $588 $1,010 $1,140 $0 $124 $1,016   2.81x
Appfolio, Inc. APPF $90 -$8 -$2 $142 $583 $637 $0 $22 $615   6.82x
Atlassian Corporation TEAM $457 $9 $130 $461 $5,830 $6,260 $0 $743 $5,517   12.07x
Twilio TWLO $219 -$30 -$2 NA $4,700 $4,920 $0 $261 $4,659   21.23x
Instructure INST $92 -$48 -$21 $189 $602 $672 $0 $62 $610   6.64x
Mindbody, Inc MB $120 -$24 -$13 $270 $662 $1,020 $16 $88 $948   7.90x
Shopify SHOP $282 -$21 $11 $243 $2,990 $3,300 $0 $180 $3,120   11.05x
Xactly XTLY $81 -$17 -$7 $151 $397 $424 $15 $46 $393   4.83x
                         
                         
                         
Average   $564 -$6 $102 $675 $4,178 $4,395 $139 $355 $4,179   6.48x
Median   $272 -$16 $20 $362 $1,475 $1,630 $2 $152 $1,482   6.16x

 

The table below presents 30 tech companies that don’t have SaaS revenue but have the characteristics of a SaaS business (heavy need for developers, no hard assets, tech-focused, etc).  We’ve organized them into 4 distinct categories which are Social, Marketplaces, Content, and Gaming.  The median revenue multiples of these categories is 7.24x, 4.04x, 4.02x, and 3.48x.  While only the Social category has higher revenue multiples than the SaaS companies above, these multiples are nothing to sneeze at and still very attractive.  One of the primary reasons these businesses attract such strong multiples is because of the cash generated: median EBITDA for each of the categories is $277 million, $111 million, $151 million, and $621 million respectively.  They make the median EBITDA of SaaS companies look ridiculous at -$16 million.

 

    TTM TTM  TTM  Capital Enterprise Market         Q2 2016
Name Ticker Revenue EBITDA FCF Surplus Value Cap Debt Cash EV Calc   EV/Rev
Social                        
Facebook FB $22,160 $11,080 $11,200 $37,405 $333,860 $356,200 $0 $23,290 $332,910   15.02x
Linkedin LNKD $3,430 $396 $1,000 $4,989 $23,630 $25,790 $1,150 $3,310 $23,630   6.89x
Line Corp LN $1,300 $159 $206 NA $9,960 $9,880 $420 $430 $9,870   7.59x
Twitter TWTR $2,480 -$4,890 $578 $6,881 $12,160 $13,620 $1,620 $3,590 $11,650   4.70x
                         
Median   $2,955 $277 $789 $6,881 $17,895 $19,705 $785 $3,450 $17,640   7.24x
                         
                         
Marketplaces                        
Priceline PCLN $9,810 $3,710 $3,500 $5,274 $73,430 $71,370 $7,260 $4,370 $74,260   7.57x
eBay EBAY $8,790 $3,070 $3,130 $14,627 $35,430 $34,520 $9,050 $8,090 $35,480   4.04x
Sabre SABR $3,250 $739 $539 $2,038 $10,740 $7,480 $3,280 $68 $10,692   3.29x
TripAdvisor TRIP $1,470 $205 $440 $758 $8,300 $9,080 $92 $853 $8,319   5.66x
Shutterstock SSTK $464 $61 $87 $222 $1,850 $2,110 $0 $266 $1,844   3.97x
Match Group MTCH $1,120 $289 $229 $441 $4,750 $3,550 $1,210 $174 $4,586   4.09x
IAC IAC $3,250 $381 $330 $11,841 $4,990 $4,610 $1,710 $1,330 $4,990   1.54x
Expedia EXPE $7,740 $838 $1,430 $8,788 $18,100 $17,220 $3,210 $2,340 $18,090   2.34x
Etsy ETSY $321 $30 $35 $411 $1,300 $1,600 $12 $278 $1,334   4.16x
Lending Club LC $508 $0 $52 $1,151 $1,570 $2,150 $0 $573 $1,577   3.09x
Angie's List ANGI $340 $33 $18 $278 $570 $570 $58 $58 $570   1.67x
Zillow Z $741 $7 -$54 $2,985 $6,070 $6,170 $230 $420 $5,980   8.08x
Just-Eat JSTLF $403 $111 $124 -- $4,944 $5,120 $1 $177 $4,944   12.26x
GrubHub GRUB $418 $94 $51 $768 $2,940 $3,210 $0 $270 $2,940   7.03x
Care.com CRCM $151 $0 $14 $283 $241 $297 $0 $56 $241   1.59x
                         
Median   $741 $111 $124 $959 $4,944 $4,610 $92 $278 $4,944   4.04x
                         
Content                        
Yahoo! YHOO $4,890 $151 $1,050 $8,888 $35,830 $40,470 $1,270 $6,380 $35,360   7.23x
Google GOOGL $81,760 $26,900 $28,980 $33,694 $478,910 $547,720 $6,270 $76,940 $477,050   5.83x
Yelp YELP $629 -$9 $60 $793 $2,580 $2,930 $0 $398 $2,532   4.02x
TrueCar TRUE $264 -$34 -$1 $515 $837 $898 $29 $103 $823   3.12x
WebMD WBMD $671 $163 $151 $9,259 $1,970 $1,910 $1,040 $1,020 $1,930   2.88x
Netflix NFLX $7,620 $314 -$896 $0 $41,640 $40,840 $2,370 $1,830 $41,380   5.43x
Pandora P $1,290 -$159 -$118 $1,153 $3,030 $3,160 $243 $293 $3,110   2.41x
                         
Median   $1,290 $151 $60 $1,153 $3,030 $3,160 $1,040 $1,020 $3,110   4.02x
                         
                         
Gaming                        
Activision Blizzard ATVI $5,370 $1,520 $1,640 $10,343 $32,410 $29,750 $5,030 $2,270 $32,510   6.05x
Electronic Arts EA $4,460 $1,120 $1,050 $1,349 $22,290 $24,500 $1,120 $3,430 $22,190   4.98x
Take-Two Interactive TTWO $1,450 $121 $109 $1,089 $2,780 $3,550 $504 $1,190 $2,864   1.98x
Zynga ZNGA $750 -$20 $10 $0 $1,490 $2,340 $0 $868 $1,472   1.96x
                         
Median   $2,955 $621 $579 $1,219 $12,535 $14,025 $812 $1,730 $12,527   3.48x

 

While SaaS revenue models are highly attractive to investors, if your business isn’t a natural fit for SaaS, don’t force it.  Instead focus on getting to profitability as quickly as you can.  It’ll earn you a fantastic multiple and you’ll suffer far less dilution as you’ll be able to grow off the cash flow. 

 

 

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