Venture Capitalist at Theory

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2 minute read / Jun 2, 2016 /

The Beginning of Consolidation in SaaS

Three billion dollar SaaS acquisitions were announced this week with Salesforce paying $2.9B for DemandWare, an eCommerce platform provider, Vista Equity Partners paying $1.8B for Marketo, the marketing automation company, and Thoma Bravo buying Qlik, a business intelligence companies for $2.9B. In addition to the absolute size, the first two trans transactions distinguish themselves high valuation multiples of 12x and 8x on trailing revenues.

CompanyPriceRevenue $MAnnual Growth RateGross MarginNI MarginFCF MarginTTM/Rev

Marketo generates more revenues is growing faster and burning less cash than OPower and Textura. Presumably, these three factors and the market opportunity afforded to a horizontal SaaS company led to a greater multiple.

That a private equity firm bought Marketo is also a bit unusual, particularly at this revenue multiple. Marketo’s estimated sales efficiency as of Q3 2015 is 0.35, meaning for every dollar of sales and marketing expense, the business generates thirty-five cents of gross profit - which is quite low. Should Vista cut the total annual sales and marketing expense of about $120M by 30%, and presuming revenue retention is not impacted, the business would generate 10% free cash flow. Perhaps that’s the rationale.

Salesforce’s acquisition of Demandware adds another cloud to the company’s collection, the eCommerce cloud. The largest SaaS company at $56B in market cap and $7B in annual revenue, Salesforce’s major acquisitions must push the company into massive markets and contribute meaningfully to revenue in the intermediate term. Ecommerce in the US is roughly $350B and growing at 14% annually - a very large market indeed.

Demandware’s financial performance supersedes the high water multiple mark of the three other companies because of the business’s greater scale, fastest growth rate, and most positive cash flow margins. It’s the only business on the list that generates cash flow.

In 2015, venture backed M&A activity halved, while acquirers continued to amass greater balance sheets. In late 2015, I wrote “In the next 18 months, the converse will be true and cash-rich acquirers who have been looking to bolster their product lines and develop new areas for growth will perceive startups as far more attractive acquisitions at more reasonable prices….This will catalyze a wave of acquisition.”

The Qlik acquisition seems to be a classic take-private at a much lower revenue multiple.

I suspect we’re only beginning to see the first signs of that wave. And if these more recent transactions are any indication, for those SaaS companies who can show strong financial performance, measured in revenue growth, margins and cash flow, there are premium multiples to be had.

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