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# The Missing Insight Around Software Multiples for Valuing Companies

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Imagine two public SaaS companies, identical in every respect but one. The first grows revenue twice as fast as the second. How much more valuable should the first be? Twice as valuable isn’t the answer.

Most investors value stocks using multiples, which tend to obscure the underlying drivers of value. Many
investors also seek to distinguish between value and growth stocks, which are commonly sorted based on
multiples of earnings or book value. The important drivers of value are opaque with these practices, and very
few investors have a clear sense of how revisions in expectations for those drivers change multiples.

Michael Mauboussin is a leading markets thinker. He wrote a short paper recently called The Math of Value and Growth that’s worth sharing to answer the question in the first paragraph. He included this chart which shows the P/E multiple on the y-axis and NOPAT (Net Operating Profit After Tax), a measure of profitability on the x-axis.

The key point is that a company growing faster should enjoy a multiple that grows geometrically with the growth rate, not linearly.

Let’s plot the current multiples of software companies to see if the shape appears in the current market. The vertical axis differs because most software companies are typically valued on forward multiple, not Price/Earnings (P/E).

The answer is yes. There is a geometric curve to forward multiples, so the market does recognize the compounding power of growth rate, as Mauboussin’s model says it should. It’s not a perfect curve as there’s a dip in the 50-60% growth rate.

That dip may be because I haven’t isolated other variables like profitability, market size, gross margin, and many others.

What we haven’t solved, and will never solve though, is the right scale of the y-axis. Is the span of 3 to 80 NTM forward multiples the “right” one that accurately values companies today based on market conditions? I’m afraid no model can answer that fully.

But the point we can make today is that multiples should follow a power-law, a geometric shape as a function of growth rate, and they do in the public software markets. And that’s why growth is so desirable: it increases the value of the company exponentially.

# Extra Crunch roundup: Antitrust jitters, SPAC odyssey, white-hot IPOs, more

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Some time ago, I gave up on the idea of finding a thread that connects each story in the weekly Extra Crunch roundup; there are no unified theories of technology news.

The stories that left the deepest impression were related to two news pegs that dominated the week — Visa and Plaid calling off their \$5.3 billion acquisition agreement, and sizzling-hot IPOs for Affirm and Poshmark.

Watching Plaid and Visa sing “Let’s Call The Whole Thing Off” in harmony after the U.S. Department of Justice filed a lawsuit to block their deal wasn’t shocking. But I was surprised to find myself editing an interview Alex Wilhelm conducted with Plaid CEO Zach Perret the next day in which the executive said growing the company on its own is “once again” the correct strategy.

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In an analysis for Extra Crunch, Managing Editor Danny Crichton suggested that federal regulators’ new interest in antitrust enforcement will affect valuations going forward. For example, Procter & Gamble and women’s beauty D2C brand Billie also called off their planned merger last week after the Federal Trade Commission raised objections in December.

Given the FTC’s moves last year to prevent Billie and Harry’s from being acquired, “it seems clear that U.S. antitrust authorities want broad competition for consumers in household goods,” Danny concluded, and I suspect that applies to Plaid as well.

In December, C3.ai, Doordash and Airbnb burst into the public markets to much acclaim. This week, used clothing marketplace Poshmark saw a 140% pop in its first day of trading and consumer-financing company Affirm “priced its IPO above its raised range at \$49 per share,” reported Alex.

In a post titled “A theory about the current IPO market”, he identified eight key ingredients for brewing a debut with a big first-day pop, which includes “exist in a climate of near-zero interest rates” and “keep companies private longer.” Truly, words to live by!

Come back next week for more coverage of the public markets in The Exchange, an interview with Bustle CEO Bryan Goldberg where he shares his plans for taking the company public, a comprehensive post that will unpack the regulatory hurdles facing D2C consumer brands, and much more.

If you live in the U.S., enjoy your MLK Day holiday weekend, and wherever you are: Thanks very much for reading Extra Crunch.

Walter Thompson
Senior Editor, TechCrunch
@yourprotagonist

## Rapid growth in 2020 reveals OKR software market’s untapped potential

After spending much of the week covering 2021’s frothy IPO market, Alex Wilhelm devoted this morning’s column to studying the OKR-focused software sector.

Measuring objectives and key results are core to every enterprise, perhaps more so these days since knowledge workers began working remotely in greater numbers last year.

A sign of the times: This week, enterprise orchestration SaaS platform Gtmhub announced that it raised a \$30 million Series B.

To get a sense of how large the TAM is for OKR, Alex reached out to several companies and asked them to share new and historical growth metrics:

• Gthmhub
• Perdoo
• WorkBoard
• Ally.io
• Koan
• WeekDone

“Some OKR-focused startups didn’t get back to us, and some leaders wanted to share the best stuff off the record, which we grant at times for candor amongst startup executives,” he wrote.

## 5 consumer hardware VCs share their 2021 investment strategies

For our latest investor survey, Matt Burns interviewed five VCs who actively fund consumer electronics startups:

• Hans Tung, managing partner, GGV Capital
• Dayna Grayson, co-founder and general partner, Construct Capital
• Cyril Ebersweiler, general partner, SOSV
• Bilal Zuberi, partner, Lux Capital
• Rob Coneybeer, managing director, Shasta Ventures

“Consumer hardware has always been a tough market to crack, but the COVID-19 crisis made it even harder,” says Matt, noting that the pandemic fueled wide interest in fitness startups like Mirror, Peloton and Tonal.

Bonus: Many VCs listed the founders, investors and companies that are taking the lead in consumer hardware innovation.

## A theory about the current IPO market

Image Credits: Getty Images/Andriy Onufriyenko

If you’re looking for insight into “why everything feels so damn silly this year” in the public markets, a post Alex wrote Thursday afternoon might offer some perspective.

As someone who pays close attention to late-stage venture markets, he’s identified eight factors that are pushing debuts for unicorns like Affirm and Poshmark into the stratosphere.

TL;DR? “Lots of demand, little supply, boom goes the price.”

## Poshmark prices IPO above range as public markets continue to YOLO startups

Clothing resale marketplace Poshmark closed up more than 140% on its first trading day yesterday.

In Thursday’s edition of The Exchange, Alex noted that Poshmark boosted its valuation by selling 6.6 million shares at its IPO price, scooping up \$277.2 million in the process.

Poshmark’s surge in trading is good news for its employees and stockholders, but it reflects poorly on “the venture-focused money people who we suppose know what they are talking about when it comes to equity in private companies,” he says.

## Will startup valuations change given rising antitrust concerns?

Image Credits: monsitj/Getty Images

This week, Visa announced it would drop its planned acquisition of Plaid after the U.S. Department of Justice filed suit to block it last fall.

Last week, Procter & Gamble called off its purchase of Billie, a women’s beauty products startup — in December, the U.S. Federal Trade Commission sued to block that deal, too.

Once upon a time, the U.S. government took an arm’s-length approach to enforcing antitrust laws, but the tide has turned, says Managing Editor Danny Crichton.

Going forward, “antitrust won’t kill acquisitions in general, but it could prevent the buyers with the highest reserve prices from entering the fray.”

## Dear Sophie: What’s the new minimum salary required for H-1B visa applicants?

Image Credits: Sophie Alcorn

Dear Sophie:

I’m a grad student currently working on F-1 STEM OPT. The company I work for has indicated it will sponsor me for an H-1B visa this year.

I hear the random H-1B lottery will be replaced with a new system that selects H-1B candidates based on their salaries.

How will this new process work?

— Positive in Palo Alto

## Venture capitalists react to Visa-Plaid deal meltdown

Image Credits: Ana Maria Serrano/Getty Images

After news broke that Visa’s \$5.3 billion purchase of API startup Plaid fell apart, Alex Wilhelm and Ron Miller interviewed several investors to get their reactions:

• Anshu Sharma, co-founder and CEO, SkyflowAPI
• Amy Cheetham, principal, Costanoa Ventures
• Sheel Mohnot, co-founder, Better Tomorrow Ventures
• Lucas Timberlake, partner, Fintech Ventures
• Nico Berardi, founder and general partner, ANIMO Ventures
• Allen Miller, VC, Oak HC/FT
• Sri Muppidi, VC, Sierra Ventures
• Christian Lassonde, VC, Impression Ventures

## Plaid CEO touts new ‘clarity’ after failed Visa acquisition

Image Credits: George Frey/Bloomberg/Getty Images

Alex Wilhelm interviewed Plaid CEO Zach Perret after the Visa acquisition was called off to learn more about his mindset and the company’s short-term plans.

Perret, who noted that the last few years have been a “roller coaster,” said the Visa deal was the right decision at the time, but going it alone is “once again” Plaid’s best way forward.

## 2021: A SPAC odyssey

In Tuesday’s edition of The Exchange, Alex Wilhelm took a closer look at blank-check offerings for digital asset marketplace Bakkt and personal finance platform SoFi.

To create a detailed analysis of the investor presentations for both offerings, he tried to answer two questions:

1. Are special purpose acquisition companies a path to public markets for “potentially promising companies that lacked obvious, near-term growth stories?”
2. Given the number of unicorns and the limited number of companies that can IPO at any given time, “maybe SPACS would help close the liquidity gap?”

## 12 ‘flexible VCs’ who operate where equity meets revenue share

Image Credits: MirageC/Getty Images

Growth-stage startups in search of funding have a new option: “flexible VC” investors.

An amalgam of revenue-based investment and traditional VC, investors who fall into this category let entrepreneurs “access immediate risk capital while preserving exit, growth trajectory and ownership optionality.”

In a comprehensive explainer, fund managers David Teten and Jamie Finney present different investment structures so founders can get a clear sense of how flexible VC compares to other venture capital models. In a follow-up post, they share a list of a dozen active investors who offer funding via these nontraditional routes.

## These 5 VCs have high hopes for cannabis in 2021

Image Credits: Anton Petrus (opens in a new window)/Getty Images

For some consumers, “cannabis has always been essential,” writes Matt Burns, but once local governments allowed dispensaries to remain open during the pandemic, it signaled a shift in the regulatory environment and investors took notice.

# How to Collaborate, Manage, and Work with Developers featuring Twilio’s Jeff Lawson

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Maybe you think developers are weird beasts that type on a keyboard pushing out code, and then as soon as they become indispensable, they quit. In fact, many founders and CEOs struggle with simply talking to their engineers and communicating their needs. You may ask, “When can we ship this?” and receive an answer that sounds like gibberish to you. The mysterious nature of engineers is also their superpower as they build products that make the seemingly impossible possible.

At his core, Jeff Lawson is a software developer first, and the CEO of Twilio second. He knows both sides of the executive & engineering equation intimately. He gets what goes on in a developer’s brain and the detailed process of building software, but he understands that businesses are motivated to move quickly. In turn, developers need to adapt.

Also, an all-time SaaStr fan-favorite, Jeff Lawson recently chatted with SaaStr CEO Jason Lemkin to discuss his thoughts on collaborating, managing and working with developers. Here are his top pieces of advice.

# 1 You don’t need to be big. The engine of progress is a small team focused on a particular problem that’s dedicated to the customer’s needs. Start small and do it well. Plus, the best talent in the field doesn’t want to be lost in the company. Make things meaningful.

#2 Keep close to the customer and the problem. Twilio’s developers take turns doing regular customer support to know what users are struggling with and to develop an intuitive understanding of what’s needed. You might also include developers on sales calls from time to time — it makes everyone feel heard. Your team must be intimately familiar with the customer’s problems.

#3 Assign problems, not tasks. Often, business teams decide what to build and send a blueprint to the developers. But if a developer doesn’t understand the customer’s dilemma, they won’t be motivated or able to adjust. Include them in the heart of the problem and leverage the breadth and ingenuity of your team. Twilio couldn’t match offers from Google and Apple. Still, they offered their developers problem solving, responsibility, and the awareness that they were vital for the company’s future, not just the back button on Chrome.

#4 Provide executive enthusiasm. The CEO of Dominoes recruited his Head of Technology personally, telling him that his realm was the most critical thing Dominoes was going to do in the next decade. He took the job and recruited an incredible team with the same enthusiasm, building his boss’s vision. A phone call goes a long way.

#5 A sense of ownership solves the small stuff. Instead of “I need you to fix bugs,” lead with, “I need you to own this item that our customers care about and make sure it operates at the level it needs to every day.” And review the different strengths of each member of your team to get the right people in the right seat.

#6 Put the pieces within the puzzle. Help your teams understand where their projects fit in. If your developer builds what they think is a core feature, but it’s just a widget in the top corner, they might have to change things last minute, from fonts to framework.

#7 Let your teams play with different toys. Many software tools require no real upfront investment, and developers can test different tools and see what really hits home. Jeff stresses that “experimentation is the prerequisite to innovation.” The more experiments you run, the more likely your developers are to make the next big thing.

#8 Create a reliable infrastructure. You wouldn’t send your salespeople out with only a notebook. Equip your developers with the right infrastructure and processes to help them write code, ship it, test it, make sure that it’s stable, etc.

#9 Take a point of view. Even if your developers are distributed across locations, make sure they have a working style they can unite around. Not every team needs to work the same way, but the people in them need to have a functional identity. And, ideally, keep within three time zones…

You can get more of Jeff’s wisdom and advice in his new book, “Ask Your Developer: How to Harness the Power of Software Developers and Win in the 21st Century,” available now.

Published on January 15, 2021

# 5 Interesting Learnings from Qualtrics at \$800m+ in ARR

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Qualtrics is one of our favorite SaaS stories at SaaStr.  Like Atlassian, Qualtrics bootstrapped all the way to the growth stage, and did it outside of the SF Bay Area.  Founder and Chairman Ryan Smith is also one of the most engaging and transparent CEOs out there, and we’ve had 3 amazing SaaStr sessions with him:

And most interestingly … they’ve gotten a second chance to IPO.  After selling to SAP for a record \$8 Billion at the time in the midst of an IPO roadshow, they then got the opportunity to spin out into a public company after all, at a far higher valuation.

How many of us get a second chance at an IPO?  Qualtrics did.  I’m almost jealous 🙂

They were at a \$723m run-rate in Q3’20, so that should put them soon at \$1B in ARR:

Here are 5 Interesting Learnings for us founders and execs:

#1. Only annual contracts, and plenty of professional services (25% of revenue).  Qualtrics does have a long tail of 12,000+ customers, but many of its motions are pretty enterprise.  99% of its customers are on annual contracts, and 25% of its revenue is from professional services.  25% of revenue from services may sound high, but it’s a fairly standard ratio in true enterprise software.

Importantly, Qualtrics’ margins remain high so it’s not losing money on its services.  Gross margins on services are about 35%.  Not the 80%+ in software, but high enough to be profitable and not be a drag on the business.  Blended margins are 73%, which is plenty high enough.

#2.  Spending more on R&D at scale, not less.  Qualtrics as a stand-alone company was spending about 16% of revenue on engineering (i.e., R&D) … and that ballooned to as much as 44% under SAP (re-investing in product) … and now has come down to 31% as the company marches again to being a stand-alone company.  There are a lot of mini-lessons here on the ability to invest when you don’t have to worry about being public, etc., but the biggest reminder and take-away is you have to invest heavily in your product forever.

#3. From \$35m in revenue in 2012 to \$800m in 2021, leveraging 120% NRR.  Just think about that for a minute.  Let the power of 120% NRR and strong growth compounding over 8 or so years sink in 🙂

#4.  About \$250,000 revenue per employee.  With 3,370 employees and \$800m in revenue, Qualtrics does about \$250,000 in revenue per employee.  This is pretty consistent with other Cloud leaders at scale.

#5. 64 \$1M+ Customers, and 1,200 \$100k+ Customers (a 1:20 ratio).  This is how a lot of us end up looking at scale.  Qualtrics grew from 27 \$1m customers in 2018 to 64 \$1m customers today.  Assuming they add up to say \$100m ARR total, that means perhaps 15% of their revenue comes from \$1m+ deals.  But for every \$1m customer, they have 20 \$100k customers.  That 1:20 ratio is pretty interesting and roughly what many vendors that sell to enterprises of different sizes, and in silos, see.

And a few bonus points:

#6.  NRR consistent at 122%.  We’ve seen some SaaS leaders NRR stay world-class, but decline a bit around \$1B in ARR.  Not Qualtrics.  NRR is basically the same 120%+- for past 3+ years.

#7.  Largest customers not growing faster than smaller ones.  While Qualtrics has expanded its \$1+ customers dramatically, growth in smaller customers actually has kept up nicely.  Overall growth rate for “large customers” is 29% Year-over-Year, which with 120%+ NRR, should fuel Qualtrics’ growth for years to come.  But smaller customers have kept up, and are still 90% of the total customer base of 12,000:

#8. The merger with SAP did seem to work. While I’m super excited Qualtrics is spinning out into its own public company, the company grew subscriptions an impressive 46% last year under SAP.  It’s very hard to be critical of those results the first full year after M&A.  Most folks slow down then, e.g. as LinkedIn did for a year or so after the Microsoft acquisition.

#9. No customer concentration, even with almost 100 \$1m deals.  This is interesting as we’ve seen a lot of customer concentration in recent SaaS leaders.  But even being enterprise, no customer is more than 2% of Qualtrics’ revenue.

Also, while most value statements are pretty generic … I like Qualtrics’ a lot.  Take a look here:

And a fun back look at the earlier days at Qualtrics here:

Published on January 15, 2021

# Doing 5, 6 or 7 Figure Deals? Don’t Forget the Services Revenue

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If you’re doing SaaS for the first time (or even the second), the whole idea of charging for “Services” may seem an anathema.  It sure did to me.

• If your product is so easy to use that you barely need sales people, why in the world would you need to charge for implementation?  For support?  For training and engagement?
• And isn’t it a bit unseemly to charge for services?  Doesn’t it sort of say your product is Old School?  SAP-level clunky?
• And isn’t services revenue a friction-full waste of time anyway?  I mean, it’s not recurring.  It’s not true ARR.  Does it even count?  I’m a SaaS company.

Maybe.  Maybe for the 15% of the world that is like you and me, charging for services doesn’t make any sense, perhaps even anti-sense.

Turns out though, that in the vast majority of six-figure contracts, virtually every seven-figure contract, and quite a few five-figure contracts … there’s always a services component.

And it almost always seems to average out to 15-20% of the ACV.

I remember the first time I experienced this confusion myself, on one our first high-five figure contracts.  We had a brutal negotiation over price.  And then, at the end, they sent us a Schedule for Services.  After getting beat down on pricing on the annual contract price … the Schedule for Services they sent us (without me even asking) guaranteed us another \$20k a year in services, with \$250 an hour as the assumed price for the services.

I didn’t fully understand what was going on here until I became a VP in a Fortune 500 tech company.

But the answer, it turns out, is simple once you get it.

First, in medium and larger customers, there’s always change management to deal with when bringing in a new vendor.  And they not only understand there’s a cost associated with that (soft even more than hard) … your buyer wants to do the least amount of change management herself as possible.  If you can do the training for her for a few bucks and saves her a ton of time … that’s an amazing deal.

Second, in medium and larger customers, they often have no one to do the implementation work themselves.  So even if you weren’t saving your customer theoretical money by helping with implementation, roll-out, support etc. … they probably have no one to do this internally anyway.  You’re going to be doing some, a lot, or all of this for them.  They are OK paying for this, in the enterprise at least.

And most importantly … it’s how business is done.  And — budgeted.  When most larger companies enter a new vendor into their ERP system, they typically add an additional budget item or two along with the core contract price.  One additional line item for service and implementation, in most cases.  And in some cases, an additional budget for other add-ons necessary to make the implementation a success (e.g., an EchoSign on top of Salesforce).  Both of these are often line-item budgeted at 15-20% of the core contract value for the product.

So net net …

• You probably can’t charge another 15-20% for services and implementation and training for a \$99 a month product.  Well, maybe you could, but it’s probably unprofitable and not worth it.
• But, as soon as the sale gets into the five figures, considering adding 15-20% for Services.  You’ll probably get it.
• And plan for charging, and delivering, additional services revenue in mid-five figure and larger deals.  The customers are happy to pay, and in fact, will expect it.

And if you don’t charge … you’re just leaving money on the table.  You’ll have to do the work anyway.  You may send negative signaling that you aren’t “enterprise” enough, that you aren’t a serious enough vendor.

And importantly, this extra services revenue still “counts” as recurring revenue if it’s < 25% or so of your revenues.  I don’t mean that literally (it doesn’t recur), but what I mean is that Wall Street and VCs and acquirers and everyone will still consider you a 100% SaaS company if <= 25% of your revenues are nonrecurring.  And you’ll get the same SaaS ARR multiple on those extra services revenues.

Same multiple.  No extra work.  10-25% more revenue.

Don’t leave the services revenue on the table.

(note: an updated SaaStr Classic post)

Published on January 15, 2021