We recently reviewed Software Equity Group’s 2018 Annual Report on the SaaS market. SEG is a fantastic investment bank that has represented our portfolio companies before and also puts out great research. Below are some of the take-aways we found most interesting from the report.
-40/20/20 is the golden ratio. Spend as a percent of revenue for sales & marketing, R&D, and G&A should be 40%, 20%, and 20% respectively. The ‘40/20/20 rule’ is a general guideline and applies primarily to larger publicly traded SaaS/software companies, but as you can see the chart below shows the ratio has been relatively consistent since 2013.
-Now is a good time to sell. Valuations in SaaS continue to be elevated, with a median enterprise value/revenue multiple of 6.7x at year end. This is the highest revenue multiple since 2013. Note the top quartile had median EV/revenue of 10.7x while the bottom quartile had a median of 3.3x.
-Growth at all costs is not optimal. Those companies posting growth of 30% to 40% year over year had better valuations than those posting growth of 40%+ because the latter group had weaker EBITDA margins.
-SaaS should be your revenue model. Recurring annual revenue models (SaaS) are far more valuable than one-time license fee or on-premise software models whereby the customer pays for a perpetual license once. Median SaaS multiples were 4.4x versus only 2.0x for license fee/on-premise.
The entire report is 92 pages and well worth the read.