How Do You Rank? Understand the
Growth and Retention Metrics of SaaS
Companies from Recent Surveys and M&A
Activity.
Today’s Presenters
Rob Belcher
Managing Director
rbelcher@saas-capital.com
Allen Cinzori
Managing Director
acinzori@softwareequity.com
You Mon Tsang
CEO, ChurnZero
ytsang@churnzero.net
SaaS Metric Definitions
• ARR & MRR = P&L GAAP! Nothing to do with payment frequency!
• Net Revenue Retention (annual, cohort, revenue)
May 2020 MRR derived from customers who were customers in May 2019 ÷
May 2019 MRR
• Gross: Same as net, excluding upsells, x-sells, price increases (but include
downgrades)
• P&L total revenue vs "up for renewal" (plus numerous other managerial
versions that may be relevant to you)
• ACV: Annual contract value
• EV – Enterprise value, SaaS valuation multiples, turns of ARR
Spending by Department
SaaS Capital Survey Benchmarking - ACV
SaaS Capital Survey Benchmarking – Growth Rate
Retention vs Company Age
SaaS Capital Survey Benchmarking – Other findings
• VC-backed vs Bootstrapped = VC slightly higher
• VC-backed = 101% net, 85% gross. Bootstrapped = 97% net, 84% gross
• VC-backed spends 14% of revenue on CS, Bootstrapped 12%
• Channel sales vs direct – no effect, unless totally hands-off = 95% net
• Payment Frequency (Annual upfront vs Month-to-Month) = No effect
Today’s Presenters
Rob Belcher
Managing Director
rbelcher@saas-capital.com
Allen Cinzori
Managing Director
acinzori@softwareequity.com
You Mon Tsang
CEO, ChurnZero
ytsang@churnzero.net
Public SaaS Company Valuations
Public SaaS multiples have increased dramatically over the past decade, particularly within the past 24 months. In addition, there is a strong
correlation between valuation multiples and retention metrics.
(1) Public SaaS Market Multiples derive from SEG’s SaaS Index of 100 publicly traded SaaS Companies. The median EV/Revenue multiple is the median enterprise value over the year divided by the TTM revenue.
(2)
Net Retention is based on latest disclosed metrics and is the net dollar expansion rate and net dollar retention rates for 21 public SaaS companies plotted against the company’s EV/Revenue on 6/5/20.
SaaS Public Market Multiples (Enterprise Value/Revenue)(1)
Enterprise Value/Revenue vs. Net Retention(2)
0.0x
10.0x
20.0x
30.0x
40.0x
50.0x
60.0x
70.0x
80.0x
100%
110%
120%
130%
140%
150%
EV/RevenueNet Retention
100
75
100
66
65
64
57
43
29
26
21
# of
companies
100
Median Enterprise Value/Revenue Multiple
SaaS M&A Deal Volume & Buyer Composition(1)
SaaS M&A deal volume has increased at a rapid pace over the past decade, with private equity firms driving roughly half of all deals in recent
years. Q1 SaaS M&A activity declined year-over-year for the first time. 2021 will see fewer SaaS M&A transactions as strategic buyers prioritize “need-
to-haves” vs. “nice-to-haves,” and PE buyers become more selective (e.g., tech, market, metrics, etc.) and disciplined.
(1) M&A data is derived from SEG’s 1Q20 SaaS M&A Update.
(2)
Private equity buyers includes Private Equity Direct and Equity Backed Strategic. Private Equity Direct includes private equity firms making platform acquisitions, while Equity Backed Strategic includes all strategic buyers backed by a private equity firm.
318
296
291
326
313
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Q1
Q2
Q3
Q4
SEG
Estimate
984
831
743
114
299
604
457
389
197
1,248
48%
52%
83%
17%
2010
2019
Historical SaaS M&A Deal Volume
SaaS M&A Activity by Buyer Type 2010 vs. 2019(2)
SaaS M&A Valuation Multiples
SaaS M&A multiples have increased considerably over the past decade, however, there remains a wide distribution of multiples.
SaaS M&A Multiples (Enterprise Value/Revenue)(1)
Revenue Multiple Distribution – Last 3 Years(2)
(1)
The median EV/Revenue multiple is the median enterprise value over the year divided by the TTM revenue.
(2)
The SaaS M&A multiple revenue distribution is over the last three years and is comprised of 253 data points.
<= 2.5
> 2.5x & <= 5.0x
> 5.0x & <= 7.5x
> 7.5x & <= 10x
> 10.0x
3.2x
3.7x
4.1x
4.1x
3.7x
4.2x
3.8x
4.4x
4.3x
4.9x
4.8x
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
1Q20
Median Enterprise Value/Revenue Multiple
SEG Net Retention Wave(1)
SaaS companies will find that growth and net retention play a large factor in the exit multiples. Three SaaS companies driving 40% growth, but varying
levels of net retention, will very likely experience a stark difference in exit ARR multiples.
(1) Wave analysis is derived from recent SEG SaaS M&A transactions. Note: Majority of SaaS sellers in dataset are for lower to middle market SaaS companies. Larger SaaS businesses should expect multiple expansion.
(2)
Net Retention looks at retention on a dollar basis. It is defined as the sum of customer expansion, contraction, and lost divided by the company’s beginning of year ARR.
2
B
A
C
2x - 4x
6x +
4x - 6x
0x - 2x
N/A
EV/ARR Multiple Ranges:
The Compounding Effects of Net ARR Retention
Consider Company C, with $5M in ARR, 40% of new customer ARR growth, and net retention of 100%. The Company has stellar new customer ARR
growth (40%) and expansion ARR growth (20%), but is not optimized, as gross attrition is 20%.
ARR Metrics
5-Year ARR
Company
C
Annual Net Revenue Retention
100%
Annual Lost %
10%
Annual Contraction %
10%
Annual Expansion %
20%
Annual New Customer ARR Growth
40%
Yearly ARR Growth
40%
Company C- ARR
Model
Year 1
Year 2
Year 3
Year 4
Year 5
Beginning ARR
$5.0M
$7.0M
$9.8M
$13.7M
$19.2M
Net New ARR
$2.0M
$2.8M
$3.9M
$5.5M
$7.7M
Net Expansion ARR
$-
$-
$-
$-
$-
Ending ARR
$7.0M
$9.8M
$13.7M
$19.2M
$26.9M
Gross Churn
SEG Net Retention Wave: Company C With Improved Retention
Consider a scenario where Company C improves gross retention, from 80% to 90%, all else equal. As a result, Company C will also see net retention
improve from 100% to 110%, and ARR growth improve from 40% to 50%.
2
C
2x - 4x
6x +
4x - 6x
0x - 2x
N/A
EV/ARR Multiple Ranges:
C
The Compounding Effects of Net ARR Retention
Company C with improved gross retention (i.e., lost and contraction), all else equal, results in $11.1 million dollar increase in Company C ARR at the
end of Year 5.
ARR Metrics
5-Year ARR
Company
C
Company C-
Improved
Retention
Annual Net Revenue Retention
100%
110%
Annual Lost %
10%
5%
Annual Contraction %
10%
5%
Annual Expansion %
20%
20%
Annual New Customer ARR Growth
40%
40%
Yearly ARR Growth
40%
50%
Company C- ARR
Model
Year 1
Year 2
Year 3
Year 4
Year 5
Beginning ARR
$5.0M
$7.0M
$9.8M
$13.7M
$19.2M
Net New ARR
$2.0M
$2.8M
$3.9M
$5.5M
$7.7M
Net Expansion ARR
$-
$-
$-
$-
$-
Ending ARR
$7.0M
$9.8M
$13.7M
$19.2M
$26.9M
Company C- ARR
Model (Improved
Retention)
Year 1
Year 2
Year 3
Year 4
Year 5
Beginning ARR
$5.0M
$7.5M
$11.3M
$16.9M
$23.2M
Net New ARR
$2.0M
$3.0M
$4.5M
$6.8M
$10.1M
Net Expansion ARR
$0.5M
$0.8M
$1.1M
$1.7M
$2.5M
Ending ARR
$7.5M
$11.3M
$16.9M
$23.2M
$38.0M
$11.1M
ARR
Increase
Valuation Impacts of Net Retention
The difference in the two scenarios is two-fold: Company C grows faster with improved retention resulting in more ARR at the end of year 5. Improved
Company C is also likely to receive a higher ARR multiple due to higher growth rate, improved net retention, and larger company size.
Year 5 Enterprise Value
Year 5 Enterprise Value- with Multiple Expansion
Improved Company C
Gross Retention: 90%
ARR: $38M
Baseline Company C
Gross Retention: 80%
ARR: $26.9M
$78M EV Increase
Enterprise Value Increase at year 5 with a fixed 7x
ARR multiple
Enterprise Value (EV)Enterprise Value (EV)$188M
$342M
$154M EV Increase
Enterprise Value Increase at year 5 with expansion in
ARR multiple to 9x from 7x
Real Time Insight from B2B SaaS Companies
“I wish I knew buyers' value high net retention as much or more than high ARR
growth rates.”
“If I could go back in time, I would have focused more on crossing the 100% net
retention threshold.”
“Having net retention over 100% is like earning compound
interest on your customer base every year.”
Q&A
Please submit your questions for our speakers.