Global SaaS Companies Update (Q3 2021)


This article provides the context and more insightful background information around metrics for public SaaS companies in Q3 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 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 98 SaaS companies where possible and narrowed down to a more specified sample in case of lacking 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

In this report, we have tracked the performance and valuation multiples of 98 stock-listed SaaS companies in Q3-2021. Following these analyses, we find that:

  • The median valuation multiple for this sample in the respective period amounts to 17.3X ARR, a drop of 5.2% compared to Q2-2021.

  • Valuation multiples have declined across the board, except from the highest valued stocks in the market with a valuation multiple of > 40X ARR. For the second consecutive quarter, these higher valued stocks are favoured by investors.

  • Performance has improved across the board yet has not led to improved valuation multiples. This finding may (partially) reflect investors’ higher financial performance expectations for these companies, the capitalization of returns for investors, or some degree of irrationality.

  • Growth rates remain the most relevant performance metric for determining the valuation multiple in Q3-2021, despite a drop in correlation from 0.61 to 0.51.

  • Rule of 40 has climbed from 42% on a median level in Q2-2021 to 45% in Q3-2021. It is notable that newly added companies to our SaaS Index tend to underperform in Rule of 40 and Cashflow margin rankings yet outperform other companies in growth rates. Since the latter metric is a more relevant determinant of valuation multiple, some of the valuation premium (17%) the entrants are traded at can be explained.

The Valuation of SaaS Companies in Q3 2021

Since tracking the performance and valuation of the public SaaS companies in our sample about a year ago, we've observed a significant increase in their valuation multiples. Simultaneously, the number of companies we included in our index raised from 80 to 98 public SaaS companies which is driven by the wave of new SaaS companies that have achieved a public listing. This group of companies includes infamous names such as Palantir, Squarespace, and UiPath.

Over Q3 2021 our index has undergone some changes such as the removal of companies like Slack and Medallia that have gotten acquired for multi-billion-dollar figures, and the adoption of 10 new logos (see below).

Since one year ago we have observed a gradual incline of valuation multiples from a median level of 16.1X in Q4-2020 to 18.3X in Q2-2021. Over Q-3 2021, however, SaaS multiples have discontinued growing and have even declined to a median revenue multiple of 17.3X. This represents a drop of 5.2% compared to July 2021, yet still a rise of 3.5% since Q1-2021. Although our SaaS Index briefly outperformed the S&P 500 in Q2-2021, the index' performance falls short of both the S&P 500's and NASDAQ's returns. Where SaaS multiples have dropped with 5.2% QoQ, the S&P 500 has remained roughly stable over the same period. We have displayed the performance of the NASDAQ in the same chart, which outperforms at turn both indices.

From all SaaS companies, 43% has still seen a jump in valuation multiples (compared to 58% in Q2-2021). Interestingly, we observe that the average valuation multiple for SaaS companies has continued its rise throughout the third quarter to 22.9X. This contradiction between the median and average tells us that a larger number of SaaS companies have experienced falling multiples, but the increases in valuation multiples have generally outgrown the drops. In line with Q2-2021, top-performing (or valued) SaaS companies are valued even higher and thus favored by investors.

Below, another graph is plotted that draws the same striking conclusion. The median valuation multiple from the SaaS companies valued higher than 40X the revenue run rate, has remained stable from Q2-2021. The average has even increased with 2% QoQ. This is fundamentally different than the valuation multiples from the companies in all other valuation categories. The biggest drops in median valuation multiples are observed in the 20-30X category, after which it gradually declines. This resembles that investors have disfavored higher valued companies over Q3-2021, except from the very-highest valued companies in the industry. We believe that this implies that the winners of this era keep the trust from investors and widen the valuation gap with other SaaS companies. Although the composition of the highest valued SaaS companies has changed, the number of companies valued >40X ARR remained 13.

Appendix 1 shows the revenue multiple of all 98 researched SaaS companies.

Gross Margins and Financial Viability

Similar to our previous observations, we notice that gross margins have very little variability over the months and remains stable at a median level of 76% in Q3-2021. Contrary to the falling valuation multiples, the median Rule of 40 (R40, combination of revenue growth and profit margin) has inclined in the third quarter of 2021 to 45% (Q2 2021: 42%). Approximately 71% of the SaaS companies has an improved or equal R40 score compared to the last quarter. As shown before, this has not resulted in a broad-weighted rise of valuation multiples though.

When decomposing the Rule of 40 score for the range of SaaS companies, it becomes clear that the median profit margin has dropped from 8% to 7.5%, which means that the primary reason for the rise in R40 derives from rising growth rates. Indeed, the median growth rate has inclined from 33% to 36%. Whereas the median growth rate for the existing sample of SaaS companies has remained rather stable (34%, average 41%), newly added entrants to our index have demonstrated stronger growth rates with a median of 47% (average: 51%). Some of the newly added companies that have stretched this number are (94%), CS Disco (88%) and Blend Labs (52%). In line with previous quarter, the overall median R40 for these newcomers is 36%, well-below the SaaS Index. Nevertheless, the median revenue multiple trades 18.7% higher than our SaaS Index. Therefore, it seems that investors reward recently listed SaaS companies with higher valuations although (profit) margins are still below par. This is a conclusion that we have drawn in our previous research too.

One more metric for financial viability is the Free Cashflow margin, which indeed tends to be lower for newcomers to the index (-3% vs. 5%). The median of 5% for the index is also a firm drop compared to the 8.5% in Q2-2021. The fastest-growing new entrants also belong to the group with the lowest Free Cashflow margins: Blend Labs (-65%), CS Disco (-23%) and (-12%).

The Rule of 40 breakdowns for each investigated SaaS company is displayed in Appendix 2.

Underlying Customer Profiles

Our version of Christoph Janz’s model of customer segments has

been updated accordingly.

Figure 3: The Animal Analogy Applied to our Sample of SaaS Companies

The allocation of companies to animals does not leave us any

noteworthy changes compared to previous periods. What we do see, is

that over time more and more companies have shifted from smaller

contracts (Flies, Mice, and Rabbits) to bigger contracts (Deers and

Elephants). Where in Q1 2021 34% of the companies belonged to the

first class, this has gradually declined to 30% in Q2-2021 and 27% in

Q3-2021. For Q3-2021 this decline is primarily caused by new companies coming in with bigger ACV’s such as Palantir (USD 8.9 million (!)), Blend Labs (USD 411 thousand), and Couchbase (USD 206 thousand).

One more material change is the median payback period from the ones targeting Elephants. This has decreased dramatically from 43 to 21, which brings it more in line with the payback periods in Q1 2021 and narrows the gap between the other animal classes. The drop in payback periods is caused by the decline of Sales & Marketing expenses as a percentage of ARR for this group which could indicate that companies are favoring EBITDA above growth. These Sales & Marketing expenses tend to be the highest among the best valued SaaS companies (46% of the revenues for companies with a valuation multiple of > 40X, compared to 40% on median). Given the high growth correlation with the valuation multiple, we assume that these best-valued companies experience still the highest growth rates and are therefore still investing more in sales and marketing.

Figure 4: Overview of Performance Metrics per Sales Category

In figure 4, the performance metrics per customer class have been showcased and benchmarked against the same metrics for Q2-2021. Across the performance metrics, some consistencies are seen periodically. Where we stated in the previous paragraph that valuation multiples have disproportionally affected companies with lower valuations, we cannot say the same for the animal classes. The median valuation multiples of all these classes have dropped. However, another interesting conclusion that can be drawn is the contradiction of dropping valuation multiples for Elephants and Deers animals, whilst de facto performing better or equal on (nearly) every performance metric compared to last quarter. As such, it could indicate that investors either had higher expectations assumed, investors, have materialized some of their profits in ‘lower’ valued SaaS companies, or markets are behaving more irrational.

Customer Retention and Growth

The median (and average) net retention rates have continued climbing from 115% in Q1 2021 and 117% in Q2 2021 to 119% in the third quarter of the year. The increasing number of Deers and Elephants animals is one of the main reasons for the higher NRRs. The newly added companies to the index bring the overall levels down as the median NRR for this group equals 117%. This is still well below the average for this group of 123%, which is caused by an outlier such as Blend Labs (179%).

Over the last quarters, the growth rates and net retention rates have alternately posed as the most relevant determinants of valuation multiples for our SaaS Index. Whereas the correlation between NRR and valuation multiples was still 0.50 in Q2-2021, this has dropped to 0.37 in Q3-2021. Instead, growth rates have demonstrated to be the performance metric with the highest correlation with valuation multiples: 0.51. This is still a drop compared to Q2-2021 where it was still 0.61. Interestingly, other performance metrics have also seen decreased correlations with valuation multiples such as Rule of 40, Payback Period, and even Founding Year. As such, fewer relationships can be identified between performance of stocks and its valuations.

Overall Benchmark Analysis

Figure 7: Benchmark Analysis Performance Metrics Q3 2021

In figure 7 the performance results across 3 classes of SaaS companies are depicted and benchmarked against the performance of the classes in the previous quarter. A similar conclusion can be drawn as before, that the performance across several groups of SaaS companies has generally not deteriorated, yet valuation multiples have suffered in Q3-2021. Another interesting conclusion is that the middle class has seen its valuation multiples drop whereas both the least performing and best performing SaaS companies have shown a slight increase in median valuation multiple.

As always, a sanity check to the SaaS Index is conducted to which extent the listed companies meet the benchmarks set to be classified as a great SaaS company. In line with previous observations, we identify that a substantial number of best-in-class SaaS companies do not qualify as a great SaaS company.


In Q3-2021 the valuation multiples across our SaaS Index of 98 companies has dropped with 5.2% compared to Q2-2021 to 17.3X ARR. In line with our findings last quarter, multiples among the highest valued SaaS companies have remained stable, or on average even climbed somewhat. As such, SaaS stocks across the board became less interesting for investors, except from the highest valued ones. Interestingly, the general performance, indicated by the SaaS metrics, has improved over the last quarter though. Thus, this may indicate that investors’ expectations of performance were higher, or investors have been willing to materialize some of their profits. Over Q3-2021, our SaaS Index has underperformed the S&P 500 and the NASDAQ by 540bps and 110bps respectively. Since Q1-2021, the SaaS Index has underperformed both other indices with 490bps and 670bps respectively.

About Knight Capital

Knight Capital is a European B2B software and go-to-market specialized investment firm founded by former entrepreneurs. We back exceptional founders with smart capital to scale their companies from Series A to B and beyond. Knight Capital’s portfolio includes fast-growing software companies (private company data platform), (Feed & Chat APIs), Smart Protection (digital piracy prevention), Zephr (subscription management software), and Superb Experience (all-in-one hospitality software). For more information, visit our website.