Real estate and tech are like the two bookends of investment. Real estate gives dividends, while tech gives the growth. SaaS, or software as a service company, is like a love child of real estate and tech. Because they give recurring revenue like real estate and can scale like tech. No wonder these are now some of the largest and fastest-growing companies in the world. Let’s see what a SaaS company is worth… SaaS is a $120 billion industry spread over 11,000 companies. On average enterprise, the customer spends $3500 per employee on annual SaaS subscriptions. That is more than what they spend on bonuses at many places. Kristie Prinz, a Silicon Valley attorney specializing in SaaS will outline the latest trends in SaaS today… THREE KEY TRENDS are impacting SaaS Industry:
Rule of Thumb
- SaaS companies with revenue less than $5M are valued using SDE or earnings. The earnings multiple varies between 3-5x.
- If a company has revenue of more than $5M, and over 50% YOY then the valuation metric is revenue, as they are investing their earnings in growth, which will give delayed returns to a buyer. Such companies are valued at 5-10x on revenue.
- Don’t be fooled by 15-25x revenue multiples of the large public SaaS companies. You are not them. Yet. These companies are established and have different benchmarks and expectations.
- Customer Satisfaction – this factor includes two metrics – churn and growth. Churn is the rate at which the company may lose customers. Good monthly churn rate is >4%; mediocre is between 4-8%, and poor churn is above 8%. Growth is the second metric. Companies with 0-10% YOY growth are considered flat, 20-40% are mediocre, and above 40% YOY growth is good.
- Built to Last – companies where processes, people, and IP are strong attract buyers. Evolved processes at customer service centers, billing, customer training are crucial. Ideally, the interface and platform should be so robust that the company doesn’t need large service centers. Identifying and protecting IP. This includes code/system, patents, trademarks. Having the validity stamp of USPTO helps buyers gain confidence that the IP is transferable. Multiple levels of management that are committed to the company’s success make all of this look easy.
- Adapt or Die – the most beautiful thing about SaaS is that everything is measurable. Analytics of data is of the utmost importance when it comes to sustaining growth. Use this data to understand customer usage, trends, needs, and allocate developmental resources. Establish a core group of partners and stakeholders who are dedicated to your success. Treat these partners like family. They will be your biggest advocates and help your company grow thru word of mouth.