SaaS acquisition multiples in 2021

Every quarter we publish public SaaS multiples (that data is further down this blog). While we lean on public multiples heavily to understand valuation trends for venture investing, there are acquisitions of public companies that also can give us a feel for where multiples are. Below is the data for all public SaaS company acquisitions in 2021.

Only 7 exits. There have only been 7 public companies acquired since December 2020. Indeed acquisitions of this size don’t happen often. Note that we have incomplete data for one of those companies (FireEye) because as part of the acquisition, a material subsidiary called Mandiant was spun-off ($400mm revenue of $941mm combined revenue), so we do not have all the data for FireEye as a standalone subsidiary.

Capped price. The median acquisition price of these companies was $5.3bln. There’s a lesson here: there are only so many acquirers that can spend billions in cash and/or company stock to make acquisitions. Once you get to $5bln+ in valuation, the universe of corporate acquirers (Salesforce, Microsoft, Adobe) and private equity firms (Thoma Bravo, KKR, Clearlake) that can afford you shrinks, such that IPO becomes the primary viable option. And of course, SaaS IPO’s don’t grow on trees (there were 27 in 2021).

9x revenue. The businesses on median traded for 8.7x trailing twelve month revenue of $833mm with YOY growth of 18%. Note, that means the multiple on the current ARR was inside of 9x since these companies are growing. While that growth may sound low, it’s pretty impressive for companies with nearly $1bln of revenue, so any multiple discount from slower growth should be more than offset by the premium these companies receive for size and the fact that these are control investments. There’s a lesson here as well: it’s fun to raise money from VC at 50x revenue, but recognize that the likelihood of keeping such a high multiple at acquisition is low. It takes a lot of growth to make up for the overpayment and achieving a good venture return for the investor. We always recommend to keep dilution low, take the money you need at a reasonable valuation as opposed to too much capital at a really high valuation. That’s how you avoid down-rounds and restructurings.

Low burn. The EBITDA burn of these companies relative to revenue was pretty negligible with median EBITDA that was break-even (0% margin on median).

Private equity is leading the way. Of the 7 acquisitions shown, only one was made by a strategic (Salesforce). All the rest were made by private equity, with Thoma Bravo actually making three of the 7 acquisitions. Again, there are very few firms that can afford a multi-billion dollar acquisition. Not surprisingly, the highest multiple of the group is Salesforce’s, paying 33x revenue for Slack.

Public SaaS Multiples

SaaS comps continue to be strong, but fell from last quarter. Of the 126 SaaS companies we follow, the average public SaaS business is trading at 17.9x revenue while the median is 12.2x. In Q3, the average was 20.0x.

The gap between the average and median is 5.7x, meaning premium SaaS companies are getting outlier valuations. 54% 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 $427mm, EBITDA of -$16mm, but positive operating cash flow of $42mm thanks to up-front collections on annual contracts. So long as you’re growing (the median annual growth rate is 23%), 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 8.4x.

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 -3%. 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, 50 trade at greater than 15x, and 37 trade at greater than 20x.

Growth is strong. The median of 23% 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 $402mm of cash on the balance sheet on median, plenty relative to annual burn (recall EBITDA is -$16mm). The number of years of cash on the balance sheet is less important given that these businesses are generally cash flow positive (median of $42mm); only 35 out of the 126 companies have negative cash flow. Note that 69 out of the 126 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: Hashicorp is at 52x, Braze is at 29x, Gitlab is at 49x, and Amplitude is at 41x. 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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