What is your SaaS Business Worth Part 2: Understanding the macro landscape while looking at SaaS
“Price is what you pay, value is what you get.” - Warren Buffett
It’s easy to get caught up in the asset, and to some extent, you should. But once you are convinced on the micro it is vital to take a step back and look at the macro. The macro-environment can result in multiple expansion, sometimes far beyond what is wise to pay for a particular software asset. Here is the Emerging Cloud or Bessemer SaaS Index. Let’s try to understand this performance.
There are many reasons the Bessemer SaaS Index steeply outperformed the major U.S. indices over the last four years. The primary factor, however, is multiple expansion, which rings true.
SaaS multiples are at an all-time high. Let’s take a look and see what your market favorites are trading at:
Equity Value / TTM Revenue Shopify: 72x
Source: Yahoo Finance
We refer to Jamin’s article and see that this trend has continued for the last several years.
Let’s take a step back and figure out what happened. In the summer of 2019, with the face of slowing global economic growth, the Fed cut interest rates and began buying tons of treasuries. This resulted in increased borrowing and ample liquidity in the financial markets. Without strong returns available in bonds, those dollars have needed somewhere to go.
Then, COVID-19 hit where global trade hit the floor. As unemployment rose during 2020, the United States took several actions to stimulate the economy. The Fed made significant bond purchases and promised to keep interest rates at or near 0% for the next decade while the federal government continued to print money through stimulus checks and forgivable business loans. This influx of liquidity combined with cheap borrowing and further foreign investment creates the framework for high valuations as investors look to the equity markets for higher returns rather than low-yielding fixed-income assets.
Since SaaS businesses could conduct operations remotely just as well as in person, technology was a logical bet for investors. Moreover, companies like Zoom and DoorDash experienced exceptional user growth because of the pandemic, which also bolstered valuations.
This has a ripple effect on private market valuations. Some companies are now getting 50-100x revenue multiples on $10M+ of recurring revenue. Given what the private market is seeing in the public market, these numbers don’t seem insane, if one were to assume that the broader trend continues. Private market valuations will continue to be high as long as the public markets can support these revenue multiples.
The question now remains, in this context, what is a SaaS business worth? The answer comes down to your view on the macro environment and what happens to revenue multiples. If you continue to believe that revenues multiples will expand and quantitative easing is just beginning, it might make sense to continue paying up or assuming the SaaS business you own is worth a high multiple. However, if you don’t believe that, then caution is warranted. You probably have to construct a sensitivity analysis (probably should be doing this anyway!) to understand what your company is worth under different scenarios. The only true point to understand here is whenever you are making a business valuation, you are in fact making two predictions:
A. What is the asset truly worth based on revenues, profit, growth, and cash-flows B. How does the macro environment for software evolve Given these two tools, we hope you are able to choose successfully!
This article is a collaboration between Archit Bhise, Sebastian Duluc, and Grant Sobczak.