Practical Summary:

• Our PVC Index of SaaS companies now trades at over 11x EV / LTM revenues
• More recent IPOs (post 2016) are at 18x
• This group of 51 companies ($680B market cap) is growing at a median 34% yoy growth rate
• This may be the first time ever that an entire sector in the public market has seen this kind of sustained growth

EV / LTM multiples for SaaS companies

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This post is an update in a quarterly series of posts that tracks the PVC SaaS Index™, a basket of publicly traded US-listed SaaS companies.

Software as a…

A Practical Summary

• The economic recovery unfolding in the US is neither U-shaped nor V-shaped … it’s best expressed as a “K-shaped recovery,” with two Americas diverging
• For wealthy Americans who are in the top income quartile, and who own significant financial assets, the recession is effectively over: incomes, employment, and (yes) even their kids’ math homework are better than ever
• Poorer Americans who are in the bottom income quartile, and who are living in the Northeast, west coast, or in some of our large cities, are still trying to navigate through the economic carnage of a once-in-a-generation economic hardship
• …

A Practical Summary:

• Practical Venture Capital has developed a new proprietary index of publicly traded SaaS companies — the PVC SaaS Index™ — which tracks 103 US-listed companies with software-as-a-service (“SaaS”) business models
• These companies have generally traded at 5-8x enterprise value / trailing revenues (“EV / LTM”) since 2013, with a brief period below (the “SaaS Crash of 2016”) and a recent run above
• The median EV / LTM multiple in this index dipped to 7.3x as the market teetered in March, but it closed an all-time of almost 11x at the end of Q2
• Recent SaaS IPOS which…

Summary:

• Practical Venture Capital has developed a new proprietary index of publicly traded SaaS companies: the PVC SaaS Index™
• This index tracks the EV / LTM multiple of a basket of 80 SaaS companies in five different verticals
• This multiple has generally been in a range of 5-8x since 2013, with a brief period below (the “SaaS Crash of 2016") and a recent run above
• SaaS multiples dipped to 7.4x at the end of Q1 2020, but rebounded to a new all-time high of 8.7x at the end of May

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Software as a Service (“SaaS”) has been around longer…

Summary

· The enterprise value of a SaaS company at IPO can be predicted almost entirely with just two metrics: 1) the annual recurring revenue in the most recent quarter, and 2) the yoy growth rate of that ARR from the year-ago period

· The relationship between revenue growth and the EV / ARR multiple can be plotted cleanly on a line of best fit that explains an IPO’s price to within 2 turns (i.e. if the plot predicts a 10x EV / ARR, the actual price would be within 8–12x)

· In order to go public, you should have…

• Since the public equity markets bottomed out around March 23, high-growth SaaS companies that IPO’ed in 2018 or 2019 have been among the strongest performers
• That group is now trading above where they were in February,when the broader markets peaked and started their freefall. “Work from home” stocks (like Zoom and DocuSign), and companies that make managing a business remotely (like Bill.com), are leading the pack higher
• If you had invested equally in the IPO prices of all of the 26 SaaS IPOs from 2018 and 2019, your investment would be up 110% as of the market close on May…

Summary:

• The S&P 500 has rallied 27% from the March 23 lows
• The fiscal and monetary stimulus has been much more rapid and significant than anything we’ve seen in prior recessions. This is a strong technical rally, and I wouldn’t fight the Fed.
• Bear market rallies … upticks during periods of depreciating asset valuations, usually driven by short squeezes and compounded by momentum trades … have happened before. …

Summary:

· 2019 was a banner year for high-growth SAAS companies going public, with 12 companies listing their shares, including Zoom, Slack, DataDog and Crowdstrike

· These companies IPO’ed at an average EV / LTM multiple of 15x, and as of April 9 … even with the recent market rout … the 2019 SAAS IPO Class is trading even higher at 18x

· If you had been able to buy into the latest pre-IPO round of these 12 companies, you would have made a 5x return, with 11 of the 12 companies in the black

2019 was a great year…