SaaS multiples are now 13x

SaaS comps continue to be strong. Of the 120 SaaS companies we follow, the average public SaaS business is trading at 20.0x revenue while the median is 13.0x. The gap between the average and median is wider than ever at 7.1x, meaning premium SaaS companies are getting outlier valuations. 57% of companies are trading at 10x revenue or greater. The data is below.

Negative EBITDA, positive cash flow. The median SaaS business had trailing twelve month revenue of $453mm, EBITDA of -$7mm, but positive operating cash flow of $48mm thanks to up-front collections on annual contracts. So long as you’re growing (the median annual growth rate is 21%), investors will overlook negative EBITDA especially if the business is cash flow positive after working capital changes.

The trend is still on. The chart in the picture shows median revenue multiples we’ve collected since Q4 2014. During that period, the median SaaS multiple has ranged from 4.6x to 14.1x with an average of 8.3x.

SaaS margins are still terrible. Investors and founders love saying “SaaS margins are great.” They’re not. They’re horrible. The median EBITDA margin for the companies above was -2%. Fixed costs for SaaS are terribly high and worse yet those fixed costs are mostly people, meaning the only way to materially cut costs is layoffs. If you’ve ever fired someone, you know cutting costs by cutting people is not easy and hurts the culture and morale of remaining members.

Premium gets a premium. Premium SaaS businesses trade at premium multiples. In the data set, 68 companies trade at greater than 10x revenue, 54 trade at greater than 15x, and 41 trade at greater than 20x.

Growth is strong. The median of 21% is good given the size of these companies. The average is even better at 27%.

SaaS businesses are healthy. There is almost no debt on these businesses (except McAfee) as banks don’t like ‘asset-lite’ businesses like software. Additionally, these companies have $420mm of cash on the balance sheet on median, plenty relative to annual burn (recall EBITDA is -$7mm). The number of years of cash on the balance sheet is less important given that these businesses are generally cash flow positive (median of $48mm; only 24 out of the 120 companies have negative cash flow. Note that 65 out of the 120 have negative EBITDA, but again that’s acceptable so long as the growth is present and cash flow overall is positive.

Recent IPO’s are killing it. Some of the latest IPO’s are trading at unreal multiples: Olo is at 33x, Monday is at 63, Doximity is at 56x, SentinelOne is at 87x. Some recent IPO’s are trading at more reasonable multiples, so the disparity in valuation for premium SaaS versus just good SaaS is very wide.

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