State of the Public SaaS Industry
News, insights and updates from the team at Bloom Equity Partners
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State of Public SaaS Industry
While The Bi-Weekly Bloom typically focuses on the Private Equity space, we thought this report on the public SaaS market would be of particular interest to our readers as public market data provides context not easily available in the private markets.
A recent brief on the current two trillion dollar public SaaS Market from Meritech Software, an investor in later-stage – and predominantly software companies - explores the state of valuations, operating metrics and KPIs, profitability and scale, and what it means to be a best-in-class public SaaS company.
Trended Valuation Multiples
Enterprise Value / NTM Revenue Multiples | All SaaS, Quartiles
This chart shows the 25th, 50th, 75th and 90th percentile NTM revenue multiples. 90th percentile companies have seen the most multiple compression, down 77% from a 2021 high of 51.9x to 12.2x today. The current median multiple is 6.5x, still below the pre-COVID median of 7.3x but down 69% from the 2021 high of 20.8x.
Enterprise Value / NTM Revenue Multiples | Top 10
The following chart shows the same view but only for the ten companies with the highest multiple daily. The current top 10 company median is 13.8x, 23% above the pre-COVID median of 11.2x but down 80% from the 2021 high of 69.0x.
Enterprise Value / Implied ARR | All SaaS
The following chart looks at Implied ARR multiples for the SaaS market for the last eight years. The current median multiple is 7.3x, below the pre-COVID median of 8.8x but down 69% from the 2021 high of 23.4x.
Operating Metrics and KPIs
Median NTM Revenue Growth and Free Cash Flow Margins | All SaaS
Public SaaS companies rapidly shifted towards efficiency. Forward growth rates decreased dramatically, and free cash flow margins increased. Companies are trading growth for profitability in today’s market.
Median Net Dollar Retention | All SaaS
Net dollar retention rates across public SaaS have continued to decline and are at their lowest point in years at a median of 115%. Upsells decreased while churn and contraction increased.
Median Implied ARR per FTE | All SaaS
While companies are raising free cash flow margins, they are forced to do more with less, given layoffs and slower hiring.
Median Payback Period in Months | All SaaS
Payback periods increase as new business is slower, expansion is harder, and churn and contraction increase.
Growth and Profitability Analysis and Regressions
Growth Rate & Profitability Buckets | All SaaS
The below analysis shows median revenue multiples segmented by estimated NTM revenue growth rate and profitability over time, with 2017 being a proxy for pre-COVID times and 2021 being a proxy for the post-COVID boom period. As the other charts show, multiples have come down across the board, even more so for higher-growth companies burning cash. Today, the Street does not expect any public SaaS companies to grow faster than 40% over the next 12 months.
Rule of 40 Buckets | All SaaS
The chart below is similar to the prior chart but is segmented instead based on Rule 40. CrowdStrike is the only company currently in the Rule of 60 bucket.
Rule of 40 Composition | All SaaS
This chart is a more nuanced view, breaking down the composition of the Rule of 40 between growth and cash flow margins and showing both the median multiple and the median Rule of 40 of each bucket. Simple regressions comparing multiples against growth or the Rule of 40 are valuable, but this analysis shows that the composition of your Rule of 40 can meaningfully impact your valuation. This is highlighted in the red boxes in the tables, showing that companies with a similar Rule of 40 growing faster can trade at a significant premium (9.0x) to companies with lower growth and higher free cash flow margins (5.4x).
The bar chart plots those red boxes and visualizes the inverse correlation between Rule of 40 and multiple for this very reason, a dynamic you could not pick up from looking at a simple regression. Investors pay the highest prices for companies that are growing quickly and have some free cash flow. This implies the company has a great market structure, and if growth was slowed, theoretically, free cash flow margins would rise even further. Blank cell(s) indicate no companies are currently in that bucket.
Company Rankings
Top 10 Implied ARR Multiple Companies
Top 10 Market Capitalization Companies
Enterprise Value / Implied ARR Multiple by Quartiles | All SaaS
You can view the full update here.
About Bloom Equity Partners
We're big fans of mission-critical enterprise software, technology and tech-enabled business service companies with a competitive moat and a loyal, diversified, and growing customer base. Whether the business is bootstrapped, VC-backed, or a division of a larger organization, Bloom is completely agnostic to the structure. We are actively seeking investment opportunities that fall within the criteria below. We welcome the opportunity to discuss potential investments with founders, operating executives and intermediaries.
Our Investment Criteria
Industry: Enterprise Software, Technology and Tech-Enabled Business Services
Geography: North America, Europe, Australia and New Zealand
Revenue: $5M - $50M (>70% recurring)
Growth: 5%+ annual revenue growth
Retention: >80% gross annual customer retention
Profitability: Positive EBITDA or near breakeven within twelve months
Investment Type: Operational control required
If you or someone you know is considering selling or taking investment in their business, we would love to learn more! Bloom has a referral partner program, which compensates referrers for introductions that lead to affirmative outcomes.
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