SaaS valuations got worse in Q3. We’re back to pre-2016 levels. Of the 121 SaaS companies we follow, the average public SaaS business is trading at 7.1x revenue while the median is 5.6x.
Multiples for SaaS companies growing above the median of 21% are better: 8.2x on average and 6.3x on median.
The gap between the average and median is 1.4x, meaning premium SaaS companies are getting slightly higher valuations, but that gap is the lowest since Q4 2018, showing the correction in overvalued names. 22% 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 $501mm, EBITDA of -$46mm, but positive operating cash flow of $33mm thanks to up-front collections on annual contracts. So long as you’re growing cash efficiently (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. The chart below 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 -11%. 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.
Premium gets a premium. Premium SaaS businesses trade at premium multiples. In the data set, 27 companies trade at greater than 10x revenue, 13 trade at greater than 15x, and only 6 trade at greater than 20x.
Growth is strong. The median of 21% is good given the size of these companies. The average is 23%.
SaaS businesses are healthy. There is almost no debt on these businesses as banks don’t like ‘asset-lite’ businesses like software. Additionally, these companies have $439mm of cash on the balance sheet on median, plenty relative to annual burn (recall EBITDA is -$46mm). The number of years of cash on the balance sheet is less important given that these businesses are generally cash flow positive (median of $33mm); only 40 out of the 121 companies have negative cash flow. Note that 76 out of the 121 have negative EBITDA, but again that’s acceptable so long as the growth is present and cash flow overall is positive.
Visit us at blossomstreetventures.com and email me directly at firstname.lastname@example.org. All founders and funds welcome! We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 50%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, bridges, inbetweeners, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.