How SaaS Companies are Valued
In a post earlier this week, I argued 1% of Salesforce’s revenues creates a unicorn. More broadly, I said that the biggest SaaS companies are so large, that they must have underserved customer segments. And there is an opportunity for a startup to identify that underserved segment, build a product to serve it better, and build a unicorn. I received a lot of comments about this post, but not the kind that I expected.
Many people wrote me to say that 1% of revenues does not equal 1% of market capitalization. In other words, even if start of were able to win over 1% of Salesforce’s revenues, it would not equate to a $1B valuation. Also, one person accused of clickbaiting: writing an article with a misleading headline, which is something I try very hard not to do.
Given that feedback, I thought it important to explain in more detail how SaaS companies are valued.
In the public markets, SaaS companies are valued based on an enterprise-value-to-revenue multiple, or EV/Rev. To calculate the enterprise value, which is the market capitalization minus cash on the balance sheet, you multiple the current revenue by this multiple.
Salesforce’s current EV/Rev multiple is 9.7x. Salesforce’s trailing revenue is $11.8B. $11.8B of revenue x 9.7x EV/Rev ~= $114B in enterprise value, which is Salesforce’s current enterprise value. That math works.
If you were to start a competitor to Salesforce - and the financial profile of the business were roughly the same - that startup would fetch a similar multiple in the public markets. 1% of Salesforce’s revenue is $118M. $118M at a 9.7x multiple = $1.144B in enterprise value. 1% of Salesforce’s revenue would create a unicorn.
2x CEO | Board Member & Advisor | Scaling SaaS & AI Companies to $100M+ ARR | VC & Private Equity
6 年Let me know how getting $118M of Revenue goes...
Managing Director, Sampford | #1 Mid-Market Tech M&A Firm in Canada
6 年I'm not sure the math is that simple.? Size/Scale is important and smaller companies don't warrant the same multiple.? Other things like revenue growth, profitability, churn, etc also have an impact.? Lastly on private multiples being higher - they might be for VC deals but they are not for M&A.? A very small percentage of SaaS M&A exits get multiples of 9.7x or higher.
Love your posts, this one seemed to skip your editor and was harder to read.
Product and GTM executive with extensive P&L experience.
6 年I didn't see the original post but aren't the addressable market size and GTM efficiency two of the drivers of the multiple you are assuming constant? Any NPV analysis would differentiate a company with 20% cost of sales and 100 years of runway before a market is saturated and growth stalls from one with 40% or just 10 years....
Founder of Install a Group & Easy Permits
6 年Refreshing to see a rational evidence based response to aggressive commenting. It breaks the cycle of negativity and we all get to learn.