Happy to help!:) A common valuation method within the SaaS...

Happy to help!

A common valuation method within the SaaS industry is EV/Forward Revenue.

When you calculate that, you will get a number.

The lines on that graph represent the average multiple of each quartile.

What I mean by that is as follows. Assume we have eight SaaS companies ordered in speed of their revenue growth.

a, b, c, d, e, f, g, h

a & b = quartile 1 (fastest growing)
c & d = quartile 2 (medium high growth)
etc

The average EV/Forward Revenue multiple of the fastest revenue growing quarter (companies a and b) will form the pink line (highest multiples). The second fastest quartile (c and d) will form the blue line. And so on.

As you can see, the fastest growing SaaS companies have suffered a much larger contraction in multiples then the slower growing companies.

What this indicates is that the market is consolidating multiples on fast growth SaaS firms. Why? Primarily due to cash burn. Fast growth generally means more cash burn and we are tending to see companies that grow at a medium pace closer to break even demand similar multiples.

I hope this helps!