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Global SaaS Companies Update (Q1 2021)



Introduction


This article provides the context and more insightful background information around metrics for public SaaS companies in Q1 2021. The research critically reflects and explains the developments of the performances of these companies. Knight Capital has utilized public sources (*) in order to establish its own analysis of SaaS companies listed on the NYSE and NASDAQ. This article is provided for information purposes only and does not constitute or form part of any recommendation to buy or sell stocks, nor is it purport to be all-inclusive. Conclusions are drawn from an overall sample of 82 SaaS companies where possible and narrowed down to a more specified sample in case of lacked data. The information contained in this article has not been independently verified and certain of the sample data has been obtained from published sources and/or prepared by third parties. While such sources are believed to be reliable, Knight Capital does not assume any responsibility for the accuracy of the information.


(*) - Our proprietary database consists of data from several public SaaS resources such as the SaaS Capital Index, the Bessemer Venture Partners Index, and Meritech Capital comparables.


Executive Summary


From our research to 82 listed SaaS companies, we have identified a 3.4% increased valuation multiple compared to November 2020 across the board, resulting in a median revenue multiple of 16.7. Interestingly, the highest valued SaaS companies have generally incurred a dive in their valuation multiple. This is further confirmed by a lower correlation coefficient between growth and valuation and in line with the assumed theory that investors were more risk-averse in Q1 2021, resulting in higher priced value stocks and underperforming growth stocks.


Moreover, it has been found that only half of the SaaS companies in Q1 2021 satisfy the Rule of 40. The best performing SaaS companies for Rule of 40 got rewarded with a median valuation multiple of 38.2, significantly above average.


In addition to this, it is observed that companies with larger ACVs in Q1 2021 have generally higher net dollar retention rates (due to higher customer loyalty) and growth rates, yet smaller ARR. The increased net dollar retention rates are often an important contributor to the valuation multiple of a SaaS company and the median net dollar retention rate for the selection of SaaS companies in Q1 2021 amounted to 115%.


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The Valuation of SaaS Companies in Q1 2021


In Appendix 1, the revenue multiples of 82 SaaS companies are displayed and show some great disparity. In our research as published in November 2020, the median revenue multiple for a selection of SaaS companies equaled approximately 16.1. As per the measurement date of 31 March 2021, the median revenue multiple amounts to 16.6 for the same selection of companies (16.7 for the updated selection of 82 SaaS companies), which represents a climb of 3.4%. Over the same period, it is observed that the S&P500 index rose by approximately 9.5%. The underperformance of SaaS companies in the last 5 months is believed to be due to rising yields on US Treasuries which affect growth (SaaS) stocks disproportionally compared to value stocks (**), and the potential materialization of realized profits from investors in highly valued stocks. The average revenue multiple on 31 March 2021 is 20.6 which is still significantly higher than the median.

Still, 66% of the investigated SaaS companies have undergone rising revenue multiples since November 2020. The selection of SaaS winners that have gained the most valuation appreciation over Q4 2020 and Q1 2021 include Domo, Bill.com, and Talend. In November 2020 we identified 7 SaaS companies with revenue multiples higher than 40X ARR (Snowflake, Coupa, Zoom, Cloudflare, Datadog, Bill.com, and nCino). Interestingly, only 2 out of these 7 companies have seen their revenue multiples inclining over the past 5 months. This could indeed indicate that the risk appetite for highly valued growth stocks has slowed down over Q1 2021 or investors question some higher valuation multiples.



Figure 1 displays the growth rate and revenue multiples of the 25th, 50th, and 75th percentile of our sample of SaaS companies. In line with our research, we can see that revenue multiples generally rise along with higher growth rates. The correlation coefficient, however, has dropped from 0.57 in November 2020 to 0.43 in March 2021. This means that higher growth rates still contribute to higher revenue multiples, though to a lesser extent than 5 months ago. Contrary, net dollar retention rates have become more important for investors when determining the valuation. This could potentially be seen as a higher degree of risk aversity among investors.


(**) - https://www.reuters.com/article/us-usd-bonds-yields-explainer-idUSKBN2BB230


Gross Margins and Financial Viability


Gross margins have been remarkably stable since November 2020 (both 76% on median). The Rule of 40 for a selection of 59 SaaS companies amounts to 39% on median (47% on average). Similar to our findings in November 2020, less than 50% of the SaaS companies achieve a score of 40% on the sum of the company’s growth rate and its profitability margin (45% in March 2021 versus 48% in November 2020). The greatest performers of financial viability (showcased by Rule of 40 scores exceeding 80%) are, starting from the best, Zoom, CrowdStrike, Shopify, Snowflake, and Zoominfo. These companies belonged to the top performers in November 2020 too and have an average revenue multiple of 49.4 (median: 38.2).


Despite lower than the demanded Rule of 40 metrics, approximately 62% of the considered SaaS companies have a positive Free Cashflow Margin (free cash flow as a percentage of revenues). On average, this amounts in Q1 2021 to 5% (8% on median). Some outliers of this group are Asana (-66%), Qualtrics (-66%), and cash machines such as Zoom (52%) and Veeva (37%).


The Rule of 40 breakdown for each investigated SaaS company has been displayed in Appendix 2.


Underlying Customer Profiles


Beyond the main performance metrics such as valuation, sales, and margins, it is interesting whether trends among the sample of SaaS companies can be observed in terms of customer segmentation. When we again adopt Christoph Janz’ approach of analogizing 5 types of sales strategies with animals, we can plot a sample of 53 SaaS companies in our graph below.


From Figure 2 we can see that, again, the majority of the SaaS companies within our sample executes Rabbits, Deers, and Elephant sales strategies. Out of 53 SaaS companies, only 3 companies are identified that deploy a Flies sales strategy, and none perform a Mice sales strategy. Interestingly, it is observed that payback periods gradually grow from ca. 20 months for companies with smaller ACVs to 26 months for companies having higher ACVs. Furthermore, it is found that 15 out of 18 companies targeting Rabbits, Mice, and Flies, deploy a freemium model to lock in their customers. This strategy tends to be more successful for business models with smaller ACVs.

Below, performance metrics are illustrated for each respective class.


From Figure 3, we can draw the conclusion that, in line with half a year ago, ARR tends to increase once ACVs decrease. It should be noted that the class with lower ACVs consists of a relatively small portion of companies, so it is important to keep this in mind. One potential reason for the negative relationship between ARR and ACV can be that bigger ACVs may indicate higher customer loyalty and stickiness, and are therefore sooner ready for an IPO. Moreover, we observe that companies with smaller ACVs have lower growth rates and net retention rates. This last aspect is something we see more often, where the share of wallet is generally easier to increase for enterprise clients than for smaller clients due to customer loyalty and price sensitivity.


Lastly, it is seen that companies deploying a Flies sales strategy have generally performed better compared to November 2020.


Customer Retention


In the previous paragraph, it has been described that companies with higher ACVs tend to have higher net dollar retention rates. It is believed that enterprise clients are stickier (also due to longer onboarding times) and less price sensitive. Moreover, companies targeting enterprises often deploy a land and expand the strategy to gradually upsell the product, which is oftentimes easier when targeting enterprises than SMEs.


Our SaaS sample of 53 companies has a median net dollar retention rate of 115% (average: 116%). A selection of the best performers include Datadog (130%), Elastic (130%), Jfrog (133%), nCino (155%), Unity (138%), Twilio (139%) and Snowflake (168%). The latter company has a staggering 168% net dollar retention rate over Q1 2021. This allows the company to grow significantly from its existing customer base. To illustrate this: $100 of revenues is worth $1,338 for Snowflake after 5 years. The tremendous net dollar retention rate of Snowflake is one of the company’s main growth drivers, and thus partially explains its high appreciation (and valuation) under investors with a revenue multiple of 105X ARR run rate. In addition to a growth driver, the NRR is an important metric for investors to monitor the stickiness of the companies’ service as it incorporates the revenue churn, upsell, and down-sell of a company.



In figure 4 the relationship between the net dollar retention rate and the revenue multiple is displayed. The two metrics have a relatively strong correlation of 0.64, meaning that it can be said that higher net dollar retention rates generally contribute to higher revenue multiples, and were more critical for investors when determining the valuation for this quarter, than growth. Potentially, upsell is better appreciated by investors in (more) uncertain times than growth.


Although the net dollar retention rates do explain some of the higher values for revenue multiples, it is also observed that some companies with higher net dollar retention rates are still valued significantly lower than others. One example is nCino, which provides operating system software to financial institutions. Despite their outstanding NRR of 155%, their revenue multiple of 37X is substantially lower than some of its peers. When having a closer look at the performance metrics of the company, it is observed that gross margins are lower than average, and payback periods significantly longer. Thus, although NRR is a positive determinator of the revenue multiple, it certainly is not the only one.


Overall Benchmark Analysis


The below table benchmarks the best-in-class, moderate performing, and least performing SaaS companies based on the respective metrics in Q1 2021.

[3] Based on a sample of 82 SaaS companies

[4] Based on a sample of 71 SaaS companies

[5] Based on a sample of 60 SaaS companies


In Figure 5 the performance results across 3 classes of SaaS companies are depicted. Based on the findings in the table, it seems that the top 33% SaaS companies, as a class, do not always meet the (widely recognized) criteria of a great SaaS company. Based on these standards, only a small fraction of the listed SaaS companies taken into consideration do indeed qualify as a great SaaS company.


Conclusion


We have observed a 3.4% increased valuation multiple compared to November 2020 across the board, resulting in a median revenue multiple of 16.7. In this research, it is noted that the highest valued SaaS companies have generally seen their valuation dropped compared to lower-valued SaaS companies. In line with this, the correlation coefficient between growth and valuation has dropped compared to November 2020, confirming that investors have favored lower growth SaaS companies and moved their capital accordingly. Since November 2020, the S&P 500 has outperformed the SaaS index with 610 bps.


About Knight Capital


We from Knight Capital are B2B SaaS investors from Amsterdam, the Netherlands. We help founders from exceptional European B2B SaaS companies from their Series A to Series B and beyond. Our entrepreneurial team of investment professionals bring in capital, growth expertise and access to our global ecosystem of partners. We believe in long term partnerships with founders and management teams to create highly successful businesses. To date, we have invested in successful start-ups such as Dealroom.co, Stream.io, Smart Protection and Zephr.


Appendix 1: Revenue Multiple per Q1 2021 Across a Selection of SaaS Companies

Appendix 2: Rule of 40 and Annual Growth Rates per March 2021 Across a Selection of SaaS Companies