If you’ve ever wondered what drives the valuation of a SaaS vendor, then take a look at this chart that a banker showed me the other day.
- 10% growth gets you an on-premises-like valuation of 2x (forward) revenues
- 20% growth gets you 3x
- 30% growth gets you 4x
- 50% growth gets you nearly 6x
Basically (growth rate % / 10) + 1 = forward revenue multiple.
You might think that profitability played some role in the valuation equation, but if you did, you’re wrong. Let’s demonstrate this by looking at CY13 EBITDA margins as reported by the same banker:
- Marketo (MKTO) -44% with a ~4x revenue multiple
- Marin Software (MRIN) -40% with a ~4x revenue multiple
- Workday (WDAY) -22% with a ~11x revenue multiple
- Bazaarvoice (BV) -6% with a ~5x revenue multiple
- Cornerstone on Demand (CSOD) 0% with a ~8x revenue multiple
- Qlik Technologies (QLIK) 13% with a ~3x revenue multiple
- Tangoe (TNGO) 17% with a ~3x revenue multiple
As you can see, there’s basically no reward for profitability. In real estate what matters is location, location, location. In SaaS, it’s growth, growth, and growth.