Software-as-a-Service (SaaS) valuations continue to do well in the public markets even after other technology companies like Facebook and Zynga struggle. One valuation metric for SaaS startups that isn’t talked about as frequently as it should is a multiple of the next twelve months (NTM) revenue. One of the reasons a forward looking revenue multiple is so important is that there’s a large premium for high growth SaaS companies vs medium growth SaaS companies.
Indy Guha has a great post on Quora titled Keeping it SaaS-y: Valuations for SaaS Companies. In article, the author shows examples for two buckets of SaaS company valuations:
- Companies with at least 30% growth and 65% gross margins trade at seven times NTM sales
- Companies with less than those percentages trade at 4-5 NTM sales
As an entrepreneur, it’s instructive to think through rough company valuations based on factors like a multiple of the next twelve months sales as a function of growth rate and gross margins.
What else? What are your thoughts on SaaS valuations and NTM multiples?