History of Public SaaS Valuations | PVC SaaS Index?

Summary:

• Practical Venture Capital has developed a new proprietary index of publicly traded SaaS companies: the PVC SaaS Index?
• This index tracks the EV / LTM multiple of a basket of 80 SaaS companies in five different verticals
• This multiple has generally been in a range of 5-8x since 2013, with a brief period below (the “SaaS Crash of 2016") and a recent run above
• SaaS multiples dipped to 7.4x at the end of Q1 2020, but rebounded to a new all-time high of 8.7x at the end of May

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Software as a Service (“SaaS”) has been around longer than the cool new “cloud.” It shares some aspects of cloud computing, but its focus tends to be clearer: SaaS is simply the delivery of software applications over the Internet from a server that’s hosted by the SaaS provider somewhere far away.

The first true SaaS startups was probably Concur Technologies, a Bellevue, WA-based provider of travel and expense management services to businesses that was founded by Steve Singh in 1993. Concur began by selling floppy disks and CD-ROMs of expense software in computer software stores. In 1996, they started selling software licenses directly to enterprises, and went public on this model in 1998. Soon after the crash of 2001, the startup’s market cap totaled only $8M.

The category went dark for a while during the 2000–2002 downturn. Concur’s story ends up fine: they evolved again, over the next few years they switched to only selling software accessible to anyone with a browser, and sold to SAP (NYSE: SAP) for $8.3B.

The first big, successful SaaS IPO was Salesforce (NASDAQ: CRM), in 2004. At that time, they were valued at about $1.1B. Under legendary CEO Marc Benioff, it’s been a long, mostly up-to-the-right run for Salesforce and its shareholders: today, the company is worth about $160B.

Since then, I’ve counted about 80 pure-play SaaS/cloud companies that have hit the public markets, and more and more go out each year. I have used them to create the proprietary PVC SaaS Index?, which is a composite of all companies, which:

1. Are now trading on either the NASDAQ or the NYSE: and
2. Derive a significant majority of recognized revenues from long-term contractual commitments (12 months or greater), and which recognize those revenues periodically over the life of these contracts.

How Do You Value a SaaS company?

Before we present the index’s multiple, let’s talk about how to value a SaaS company. Most high-growth SaaS businesses (public and private) trade based on their Enterprise Value over Revenue multiple.

A company’s “Enterprise Value” (“EV”) is best thought of as the total value assigned by investors to a company’s ongoing operations. It is properly defined by adding the total of the market capitalization of a company’s equity securities plus the value of its debt, and then subtracting the cash / cash equivalents on hand.

I like to look at the EV to the last twelve months of revenue (“LTM”) as a way to compare valuations. While the ideal measure in theory would be to compare EV to the projected next twelve months of revenue (“NTM”), the reality is that projections for fast-growing SaaS companies are usually volatile and hard to come by. EV / LTM offers a better comparative basis across companies because it eliminates the bias and uncertainty that comes with predicting the future.

PVC SaaS Index ?

The chart below shows the median historical EV / LTM of SaaS companies in the PVC SaaS Index? over time, going back to 2006:

Chart 1: Historical SaaS Valuations since Q1 2006

Since early 2013, the median EV / LTM for this group has generally been between 5-8x.

If we look more carefully at just those SaaS companies that went public in 2017 or later, these 33 companies are now trading at over 14x, very close to the all-time high recorded in Q4 2019.

This smaller basket is comprised of younger, smaller cap companies (the average market cap of these companies is just $9.4 billion, versus $40 billion for the entire index) that are growing quickly. Chart 2 below shows how this group has traded, and how quickly it recovered after the Q1 decline.

Chart 2: 2017–2019 SaaS IPOs

The premium valuation in this group seems largely to be the result of higher projected revenue growth rates, from 2019 to 2021. Pulling from the analyst coverage that these companies get, this basket of stocks has a median CAGR from 2019–2021 of 22%. The rest of the index has a median projected three-year revenue CAGR of only 10%, and trades at just south of 8x EV / LTM multiple.

Check out Chart 3, which compare 2019–2021 revenue CAGR (x-axis) and compares that to the EV /LTM multiple (y-axis), and you can see the strong relationship between revenue CAGRs and multiples (the outlier in the top right is Zoom, which recently reported its Q1 2021 results with a 169% yoy increase in revenue, and a 354% increse in customers):

Chart 3: Growth vs. multiple for recent SaaS IPOs (2017–2019)

Verticals within the PVC SaaS Index?

This index includes companies that operate in different verticals. To provide some additional segmentation and insight, we split the index into five major verticals:

• Security (25 companies) — these are companies that manage controls, permissions, access, identity / fraud detection, and the like to let businesses run more securely from the cloud.
• Analytics / big data integration (15 companies) — these companies allow enterprises to store, collect and analyze large volumes of data in the cloud, and enable them to synthesize, visualize and act on that information.
• Business planning / supply chain (14 companies) — every company needs help with financial planning, paying taxes, billing their customers, hiring / onboarding employees, and managing their sales funnel. These companies sell cloud-based automation solutions to all of the above.
• Collaboration (10 companies) — these companies allow remote individuals and employees to communicate, share and edit documents online, etc.
• Infrastructure / dev ops (10 companies) — these companies develop software for businesses to help manage their networks, systems, and information technology infrastructure.

We have also included four mega-cap companies that derive a large and growing majority of the revenues from SaaS services … Microsoft (NASDAQ: MSFT), Adobe (NASDAQ: ADBE), Salesforce (NASDAQ: CRM), and Oracle (NYSE: ORCL).

While these verticals have generally traded together, with a correlation of over 0.7 to the overall PVC SaaS Index?, the Collaboration vertical (featuring companies like Zoom, DocuSign, Slack and Atlassian) has soared to a revenue multiple of nearly 25x during the COVID-19 crisis. Clearly these companies have directly benefited from increased demand, from employees working from home and requiring productivity solutions.

Chart 4: SaaS Multiples by Vertical

Conclusion

The past 15 years have seen some great public SaaS companies, and generally very good returns for investors. At the end of 2019, the median valuation of a SaaS company made an all-time of 8.7x EV / LTM, before dropping sharply to 7.2x in sympathy with the rest of the market in March.

As of the end of May, we’re now above the 2019 LTM revenue multiple highs - on average investors are paying higher multiples today for SaaS companies than at any other time in public SaaS trading history.

For more information on the components of the index, please contact Aman Verjee at [email protected]. Aman Verjee is a General Partner and Founder of Practical VC.