Volume and Choice drive down Startup SaaS M&A Multiples.

SaaS M&A activity in 1Q19: VC Funding 33.7%, Bootstrapped 66.3%
SEG: 1Q19 SaaS M&A Update, via http://softwareequity.com/research/

SaaS multiples of venture-backed SaaS Startups are driven down by volume and choice. Tom Tunguz has written a lot about SaaS multiples, specifically about Where are SaaS Companies Priced After the 2018 Correction. We are getting a lot of inquiries from VCs, entrepreneurs, and LPs alike about pricing. But it is always puzzling to get questions about the break-out success stories. If a company works, it works — there is not much sense to discuss whether a 15x or 10x SaaS multiple makes sense. But what about the sideways cases? What about PE-led or corporate M&A of venture-backed SaaS startups?

Historical Software Industry M&A Volume

The Software Equity Group is publishing great research. Most recently, they published their 1Q19 SaaS M&A Update. Deal volume is up by number of deals and volume. Yay. There is a lot of volume and choice for buyers.

Historical software industry M&A volume (VC-backed and bootstrapped): deal volume is increasing
SEG: 1Q19 SaaS M&A Update, via http://softwareequity.com/research/

Median valuation seem to be stable around 4.5x TTM EV/Revenue, and above the Median of 4.0x for 13 of the past 12 quarters. Yay.

1Q19 SaaS M&A valuations: somewhat stable around 4.5x median TTM EV/Revenue
SEG: 1Q19 SaaS M&A Update, via http://softwareequity.com/research/

Most M&As are Undesirable for VCs

The interesting slide is #20:

Revenue multiples of SaaS M&A transactions cover a wide range - most of them are done around 3.5x TTM EV/Revenue
SEG: 1Q19 SaaS M&A Update, via http://softwareequity.com/research

I have quite a bit of data around VC-backed M&A exits (the above medians are for both VC-backed and bootstrapped companies). Unfortunately, 33.7% M&A transactions of VC-backed startups are not exactly the 34.6% of the >6.0x group above ;). There is a strong concentration around the 3.5x TTM revenue multiple. What does that mean for your startup — as an investors as well as a CEO?

  • Your startup is forecasting bookings growth of 60% in the next twelve months (NTM), and 85% of your bookings will be revenue. Your debt is a bit higher than your cash balance at the time of acquisition. You were looking to close another round but it is not coming together. You get an acquisition for 6.0x TTM revenue multiple — which is really a 3.2x NTM ARR multiple … poop.
  • Your startup is forecasting bookings growth of 100%, and you get an acquisition offer at a 7.0x TTM revenue multiple — which is really a 3.0x NTM ARR multiple.
  • Your startup is forecasting bookings growth of 30%, and you get an acquisition offer at a 3.5x TTM revenue multiple — which equals a 2.3x NTM ARR multiple.

SaaS Multiples — What Success Looks Like

As you can see, these NTM ARR multiples are far below the 7.0x or 9.0x or even 5.0x NTM ARR multiples — not really what you read about in the usual “valuation guidance for venture-backed startups” or see at leading public SaaS companies. But this is the reality of the majority of transactions. An acquisition by Cisco for $40 million at 10x your TTM revenue of $4 million might not feel great, given your ambition. And it will most definitely not pay back my fund. But it is also a successful outlier.

I urge you to prepare your board, your employees, your early-stage investors on the reality where most M&A exits end — even for great companies, good products, and with reasonable revenue.

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