David Cummings on Startups

SaaS Valuations and NTM Multiples

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David Cummings

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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?

Comments

One response to “SaaS Valuations and NTM Multiples”

  1. fuzeus Avatar
    fuzeus

    Very informative, especially for the SaaS start ups that are currently in the rounds where they can accurately predict the current and expected growth based on their various revenue models. Also, I agree that the NTM multiples that you listed are accurate.
    I think that there are two topics you should address in future posts though. The first is along the lines of why does this not directly correlate to publicly traded companies like Linkedin. As you are probably aware of, there is a great debate on whether Linkedin is over priced, especially with price to earnings at 901x.
    The second thing that I would like to see discussed is how this method could translate to the very initial phases of SaaS start ups. Within the first few months, many entrepreneurs look for their first round of investment, say $25,000. These companies, can many times, not have growth rates, and only theoretical NTM revenue. How do they then use a similar process to determine the amount of equity that they should be giving up for said investment, without potentially losing their shirts?

    Reply

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