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SaaS has been hot for a while, now blistering

HR software business Workday has just upped the proposed share price in its coming IPO to $24-26, taking its valuation over $4bn. That’s 30x this years forecast revenues of $134m. Moreover, the company says in its filing that it has “a history of cumulative losses and we do not expect to be profitable for the foreseeable future”, and is proposing a two tier share structure that will leave the co-CEOs with control of the company.

This news prompted me to look at a couple of other SaaS businesses. Salesforce, the grand-daddy of the sector has a market cap of $21bn, which is 7.2x the revenue run-rate from the last quarter. Like Workday, Salesforce is loss making. Jive Software has a market cap of $875m, which is 8.1x the revenue run rate. Like Workday and Salesforce, Jive is loss making. Bazaar Voice has a market cap of $1.1bn, which is 7.6x the revenue run rate. Live the other companies, Bazaar Voice is loss making.

I looked at a list of other publicly traded SaaS companies which included Netsuite and Exact Target and the picture was pretty similar for every company I looked at.

It isn’t just the public markets that love SaaS companies. M&A has also been hot with Microsoft’s $1bn acquisition of Yammer, Oracle’s $1.9bn acquisition of Taleo and SAP’s $3.4bn acquisition of SuccessFactors standing out as landmark deals.

I know a few of these businesses and they have great products which deliver real value to their customers, combine that with strong growth and you have a recipe for building real value, which is why these companies are attracting such high valuations. That said, it is only when these companies translate revenues into profits that real value is created and until that happens there is more scope for downside than upside for these companies. If the Street does re-rate these companies there will be a knock-on negative effect on the exit environment for their smaller brethren.

  • http://insomanic.me.uk/ AndyY

    I was going to post this link on your last post after reading both in quick succession, but it’s even more relevant to this post while noting the loss-making aspects of these SaaS businesses – I found the analysis of the so-called cash flow “trough” of SaaS models (pages 2-3 of the post below) particularly insightful and interesting reading within the context of how to assess SaaS businesses:

    http://www.forbes.com/sites/jjcolao/2012/10/02/running-a-saas-business-answer-these-four-questions/ – post by David Skok from Matrix Partners.

  • http://www.facebook.com/people/Sharky-Rechinas/100003609817993 Sharky Rechinas

    JElastic with Layershift UK as a provider is a Platform as a Service – something better and more advanced than AWS.
    We use them they are ubercool.

  • http://www.theequitykicker.com brisbourne

    The Bill Gurley article linked to in the David Stok post explains the problems with LTV in more detail.

  • http://www.theequitykicker.com brisbourne

    Interesting

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