4 Criteria for a 5-8x Adjusted EBITDA Software Exit

Upland Software is a publicly-traded SaaS company based in Austin, TX that specializes in acquiring sub-scale SaaS companies and rolling them into the portfolio. To date, they’ve acquired 14 companies and are actively looking to buy more. With a market cap of $480 million and an annualized run-rate of $80 million (source UPLD), they’ve executed this strategy for 7+ years.

Here are the four criteria for Upland Software acquisitions:

  • Financial Profile – Revenues in the $5-$25 million range
  • Recurring Revenue Base – Renewal Rates > 90%
  • Enterprise Applications – Built-for-purpose Enterprise Work Management
  • Geography – U.S., Canada and E.U.

According to their press release from a few months ago they pay 5-8x pro forma Adjusted EBITDA:

The acquisition is within Upland’s target range of 5-8x pro forma Adjusted EBITDA and will be immediately accretive to Upland’s Adjusted EBITDA per share.

Long term, their target is an Adjusted EBITDA margin of 40%.

Here’s how an acquisition might work:

  • $10 million/year SaaS business makes $3 million/year Adjusted EBITDA
  • Upland acquires the SaaS company for $21 million (e.g. 7x Adjusted EBITDA)
  • Upland cuts expenses and raises the Adjusted EBITDA from $3 million to $4 million (e.g. 40% target)
  • Upland’s stock trades at ~18x Adjusted EBITDA (e.g. $26 million Adjusted EBITDA expectation for 2017 with a valuation of $480 million ignoring current assets and debt – source)
  • $4 million of new Adjusted EBITDA increases the value of the business by $72 million, making the $21 million acquisition very profitable

Entrepreneurs thinking through potential exit value for their startup should understand these values and how a financial buyer might value the business.

What else? What are some more thoughts on this example with four criteria for a 5-8x Adjusted EBITDA software exit?

Run the Annual Expenses Audit and Cut the Waste

Recently I was talking to an entrepreneur that had just finished an exercise to get more efficient with his business and reduce the burn rate. After making a concerted effort over 30 days to cut waste they now save $200,000/year. Here are a few areas to analyze:

  • Credit Cards – Start with the biggie. Credit cards are so easy — almost too easy — to buy stuff that many entrepreneurs don’t scrutinize the purchases. Take last month’s statement and make the card holders justify each expense in a Google Sheet.
  • Amazon Web Services – Cloud platforms make it incredibly simple to scale services, and scale the bill. Walk through every line item of the last AWS bill and the corresponding usage of that item (e.g. do you need all those full-time EC2 instances when spot instances might work instead? what about reserved instances?)
  • Unused SaaS Apps – With so many interesting SaaS apps out there it’s easy to sign up and pay only to not truly integrate into the business process such that there’s little-to-no value. Go ahead and cancel it.
  • Unused SaaS App Users – Many SaaS apps are mission critical must-have products but that doesn’t mean paying for more than you need. How many users of Salesforce.com do you have? Do you really need them all? What other apps can be adjusted?

Entrepreneurs would do well to audit expenses at least annually, if not more frequently, and cut the waste. Just because you need to move fast doesn’t mean you need to waste money.

What else? What are some other areas to look for savings?

Quarterly Wrap Up

With the start of Q3 upon us, it’s a great time to review the end of the quarter process. In the pre product/market fit days, there isn’t much process to follow but as the startup grows and scales, it’s important to scale the processes as well. Here are a few ideas to consider:

  • Simplified One Page Strategic Plan – The one pager is the overall business alignment doc. Priorities change every quarter, along with the basic metrics, but much of the document stays the same. 
  • Quarterly Check-ins – Whether it’s monthly or quarterly check-ins, it’s critical to spend time with team members and constantly calibrate. With small startups, it’s more ad hoc and formalizes as the business grows.
  • Monthly SaaS Metrics – While the one pager has great high-level info, the monthly SaaS metrics sheet breaks it down into dozens of data points and provides a fine-grained view into the performance of the business.
  • Start, Stop, Continue – What’s working well, not working, and needs to change in the business? Just like a scrum meeting, it’s important to evaluate the overall business functions as well.

Figure out what’s right for the startup and continuously evolve the rhythm, data, and priorities.

What else? What are some more ideas to wrap up each quarter?

The Three Critical Monthly Cash Questions

Whenever I meet with an entrepreneur that’s raising money I ask about current funding, burn rate, and the number of months of runway. Managing cash, and understanding the corresponding business unit economics, are two critical functions of an entrepreneur, yet many don’t do it. In fact, ensuring that there’s always enough cash in the bank is one of the three most important things a CEO does.

Every month, entrepreneurs should be able to answer these three questions immediately:

  • How much cash do we have?
  • How much cash are we burning each month?
  • How many months do we have until we run out of money?

Pretty simple, right? Only, many entrepreneurs I talk to can’t answer these three questions with confidence. Entrepreneurs need to understand the importance of cash and manage it accordingly.

What else? What are some more thoughts on the three simple monthly cash questions?

Quarterly Simplified One Page Strategic Plan

Once a startup has product/market fit, one of the best things they can do is a Simplified One Page Strategic Plan and update it on a quarterly basis. The concept is easy: put the most important high-level things about the business on one side of one sheet of paper and ensure everyone in the organization understands all aspects of it. Nothing more, nothing less — make it a simple doc.

Here are the contents of the Simplified One Page Strategic Plan (Google Doc template and example plan):

Purpose

  • One line purpose

Core Values

  • General – fit on one line
  • People – fit on one line

Market

  • One line description of your market

Brand Promise

  • One line brand promise

Elevator Pitch

  • No more than three sentences for the elevator pitch

3 Year Target

  • One line with the goal

Annual Goals

  • 3-5 annual goals in table format with the start value, current value, and target value

Quarterly Goals

  • 3-5 quarterly goals in table format with the start value, current value, and target value

Quarterly Priority Projects

  • Three one-line priority projects with the percent complete for each

 

Entrepreneurs would do well to implement the Simplified One Page Strategic Plan (Google Doc template, example plan) and update it on a quarterly basis.

What else? What are some more thoughts on the Quarterly Simplified One Page Strategic Plan?

Notes from the Okta S-1 IPO Filing

Okta, a SaaS identity management platform (software to manage which corporate applications people can use), just released their S-1 IPO filing to go public. You might wonder how big the market is to manage authentication and authorization in the cloud, and as we’ll see, it’s quite large.

Here are a few notes for the Okta S-1 IPO filing:

  • Founded in 2009 (pg. 1 – Note: founding to IPO in eight years is fast!)
  • 2 million people use Okta daily (pg. 1)
  • 2,900 customers (pg. 2)
  • Revenues (pg. 2)
    • 2015 – $41 million
    • 2016 – $86 million
    • Last nine months – $112 million
  • Losses (pg. 2)
    • 2015 – $59 million
    • 2016 – $76 million
    • Last nine months – $65.3 million
  • Estimated $18 billion global opportunity (pg. 3)
  • Over 5,000 integrations available (pg. 4 – Note: strong network effect)
  • Product modules (pg. 4)
    • Universal directory
    • Single sign-on
    • Multi-factor authentication
    • Lifecycle management
    • Mobility management
    • API access management
  • Original company name: Saasure (pg. 6)
  • 12% internation revenue (pg. 34)
  • Accumulated deficit of $270 million (pg. 51)
  • 11% of revenue from professional services (pg. 57)
  • Weighted-average contract duration of 2.4 years (pg. 62)
  • Define contribution margin as the annual contract value of subscription commitments, or ACV, from the customer cohort at the end of a period less the associated cost of subscription revenue and sales and marketing expenses (pg. 63 – Note: this is the SaaS Magic Number)
  • 443 customers with an annual contract value over $100,000 (pg. 65)
  • Deferred revenue of $100 million (pg. 78 – Note: this means customers pay their annual subscription upfront making for a significant amount of “free” working capital)
  • “Okta” is the unit of measure for cloud cover in meteorology (pg. 88)
  • Ownership (pg. 132)
    • Co-founder/CEO – 10.3%
    • Co-founder/COO – 6.2%
    • VCs – 65.7%

Okta is like a utility providing a core service that everyone needs but doesn’t get much attention. Identity management in the cloud is critical infrastructure with a massive market and Okta, as the leader, will have a successful IPO.

Congratulations to Todd and the team!

What else? What are some more thoughts on Okta’s S-1 IPO filing?

Quick Notes on Fast-Growing SaaS Startup Intercom

Intercom is a fast-growing SaaS startup that provides customer communication software for doing live chat, in-app customer messages, email triggers, helpdesk support, and knowledge base content. Their CEO recently published an interesting blog post titled Vanity metrics, the future, and 100,000 thank yous with a number of interesting metrics.

Here are a few notes on the blog post and Intercom:

  • Started in 2011 (source)
  • Took four months to raise $500k (source)
  • Raised $1M angel round in 2012 (source)
  • Raised $6M Series A in June 2013 (source)
  • Raised $23M Series B 30 months after starting the business (source)
  • 7,000 paying customers after four years (source)
  • 50% of the 280 employees are in product and engineering as of last year (source)
  • Raised $35M Series C four years to the day they started the company (source)
  • Raised $50M Series C-1 in mid 2016 for a total of $116M (source)
  • Took two years to hit $1M in annual recurring revenue
  • 300+ employees today
  • 100,000 monthly active users
  • 400,000,000 customer conversations per month
  • Educate, the knowledge base product, is at $1.5M ARR
  • 17,000 companies that are paying customers
  • Grew from $1-50M in ARR in three years ($2,941 average revenue per year per customer)
  • Revenue run rate at end of year:
    • 2013 – $1M
    • 2014 – $7M
    • 2015 – $22M
    • 2016 – $50M
  • 2016 operating margin of -36%

Impressive metrics all around and easily one of the fastest growing SaaS companies in the world. Congrats to Intercom on reimagining customer communication for the modern business and building an incredible company.