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Ann: June Quarterly Report and App 4C, page-90

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TripleTop

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01/08/17

11:18

Post #: 26210880
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Originally posted by TripleTop ↑

Here is the article:

Determining the worth of your SaaS company

Posted Oct 7, 2016 by Todd Gardner

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Todd GardnerContributor
Todd Gardner is the founder and managing director of SaaS Capital.

An entrepreneur recently asked me “What are SaaS companies ‘going for’ these days?” I said, “Well, it depends on a number of factors, but 5 times annual run-rate revenue is average.” His response was pure disbelief. “What? You have to be kidding me! Last time I checked they were going for 10 times revenue!”
And so it goes; the opaque, confusing and highly volatile practice of valuing a private SaaS business is frustrating for entrepreneurs and investors alike. Furthermore, the lack of transparency adds a tremendous amount of friction to a capital raise or the sale of a company.
The reality is, it’s not all that hard to get a quick read on your SaaS company’s valuation. The two most important things to know are: What are public SaaS companies “going for” at the time, and how fast is your business growing relative to its peers. These two things will get you 75 percent of the way to an answer, and three or four other metrics will get you the rest of the way there.
The average public multiple is easy to get and it should always be updated when getting a read on valuation. Go here to pull the data and get the revenue multiple based on the current year expected revenue. Once you have that, subtract 1.3 to get the current private multiple based on ARR* (annualized run-rate revenue). Private multiples are lower because they are generally riskier and the stock is not easy to sell. If the public multiple were 7.0 times revenue, for example, then the average private multiple would be 5.7 times.
Building from there, the key company-specific metric is revenue growth rate. But it gets a little tricky here because to get a higher multiple, your company must be growing faster than other similar-sized SaaS companies. It’s easier to grow quickly when a company is small, and so the growth premium varies by company size.
The chart below shows the average growth rate for different-sized private SaaS companies based on a 2016 survey of 400 companies, and this should be used as your benchmark. If your company is growing faster than average for its size, the business will be worth more than the 5.7 times calculated above; if it’s growing slower, it will be worth less.

How much of an impact the growth rate has on valuation can be estimated based on public SaaS company values. A rule of thumb would be if your business is growing at twice the average rate, the valuation multiple would grow by 50 percent. For example, a $3.0 million SaaS company growing at 100 percent (twice the rate of its peers) would get a growth premium of 2.8 (50 percent of the baseline multiple of 5.7), making it worth about 8.5 times revenue, or $26 million. Similarly, a $60 million SaaS business growing at 50 percent is also growing twice as fast as its peers, and would also garner a similar growth premium.
There are four other metrics that will impact a company’s value beyond the current state of the public market and its growth rate. They are:

Size of the addressable market

Retention rate

Gross margins

Capital efficiency

Do better than “average” on these factors and the valuation multiple will go up; do worse, and it will go down. The chart below can be used to estimate the overall impact of each factor.

The fact of the matter is, SaaS companies, on average, were never “going for 10 times revenue,” only a few outliers were. The reality is a little less sexy, but still very healthy, and knowing where your business stands based on real-world data will give you an advantage in negotiating the best possible outcome for your company.
* Based on an analysis of hundreds of private company exit multiples tracked by the 451 Group over 2014, 2015 and 2016, and compared to the public SaaS valuation data at the time.

Expand

Okay, I've had a crack.

- Average revenue multiplier is 6x

- Median growth for a SaaS company turning over less than $1m = 75%

- Given we are growing (annual growth) at c.4x this multiply the revenue multiplier by 75% to 10.5x

- How did I get the 4x - growth of 25%, 14%, 50% and 25% over the last 4 quarters gives an annual growth rate of ~265%.

- Other 4 factors listed I'd dare say might be revenue multiplier neutral (we don't have some of this information and the market size is well in excess of $1bn!)

- So in summary, 10.5x revenues (currently $625k) gives us a valuation of $6.8m. Add cash on hand of $3.2m. And that bring us to a tidy $10m, about right where we are!

It looks like VPC is currently being valued based upon the SaaS business only, and rightly so given that's where the value lies.

So to maintain this revenue multiplier the market needs to see a 30% growth QoQ.

If we move to averaging 50% QoQ then we are not only on the way to CFP in 3 or 4 quarters time but also a clear re-rate in SP as the fear for cap raises diminishes and the revenue multiplier (and revenues) both increase.

In fact, just maintaining a 30% growth QoQ should "in theory" result in a gradual increase in valuation as revenues increase. If we can maintain the growth levels while heading above $1m in SaaS revenues then the revenue multiplier should also jump providing another SP re-rate (as these larger turnover companies tend to see growth slow)

So, let's play with some numbers.

What if we get a 50% increase in the September quarter? That means SaaS revenue grows from $625k to $935k and average annual growth goes from 265% to 320%. Assuming no change in multiples for the higher growth rate (perhaps the whole market grows) then applying the 10.5 multiplier to our $935k gives a valuation of $9.8m + any cash on hand (assume $2m) so c.$12m or +20% from today's c.$10m MC.

As you can see the only number we REALLY need to know about is the SaaS revenue growth. And by the looks of the averages and medians in the SaaS world our growth rates are not looking too shabby!

As I said in an earlier post, I think it is still early days for Velpic and prices around these levels could provide an excellent entry point into a start up in the very early stages with significant market potential. It's very easy to get caught up in all the noise of the quarterly and metrics etc but at the end of the day we are growing at a decent rate. If that rate continues and we can avoid another cap raise then I expect a serious re-rate over the next 12 months.

All from me.

Cheers,
TT
Last edited by TripleTop: 01/08/17

VPC Price at posting: 1.7¢ Sentiment: Buy Disclosure: Held
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0 Great analysis

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