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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.
