In 2021, private companies were raising at 100x ARR and best-in-class public companies were trading close to 100x NTM (next-twelve-months) revenue. Today’s world couldn’t be more different. Typically, at the beginning of a year we do a post summarizing the characteristics of the past year’s IPOs in an attempt to understand “what it takes to go public”. Because there were zero high-growth SaaS IPOs in 2022 we’ve decided instead to benchmark the high-growth SaaS companies that currently trade at the highest ARR multiples. Our aim is to help CEOs and management teams understand what it takes to earn a premium multiple in the public markets. Out of the almost 100 public pure-play SaaS companies we track, only ~20% trade at greater than a 10x ARR multiple (rounded to the nearest 10th), hence we believe it is a reasonable threshold to define “best-in-class.” An ARR multiple is calculated as a company’s enterprise value divided by its current quarter implied ARR, which is total quarterly revenue multiplied by 4. Public companies are typically valued on NTM (next-twelve-months) revenue, which is the GAAP revenue that Wall Street analysts expect a company to generate over the upcoming 4 quarters. We chose to focus on ARR multiples here because it is the more common valuation framework for private companies. As you’ll see below, the 10x ARR Club is an exclusive one. In this post we analyze the financials and operating metrics of companies in this club to better understand what is required in 2023 to reach what has historically been a premium multiple for SaaS companies.
You can access the entire 10x ARR Club Report here.
The summary statistics of these companies are below:
Source: CIQ as of 23-Jan-2023, company filings, and Pitchbook.
Before digging into these statistics, we should first understand just how materially the valuations of the 10x ARR Club companies have changed: Across the group, multiples have compressed by 70% from their respective peaks in late 2021. The chart below compares each company’s COVID high ARR multiple (most of which were in the August through November of 2021 time frame) to their multiple today. The median has come down from 38.8x to 11.8x today.
Enterprise Value / Implied ARR Multiples Comparison
Source: CIQ as of 23-Jan-2023 and company filings.
This multiple compression occurring throughout 2022 has had and will continue to have massive ripple effects across the industry. With 70% implied ARR multiple compression, a business must grow its top-line by a multiple of 3.3x to reach the same enterprise value, which could take years. This group of company’s median growth rate is 47% and assuming that growth rate persists, it would take 3.1 years to reach that same valuation again. Inclusive of future dilution, it would take even longer. And due to this multiple compression, the median decline in market cap from this group is 60% from their COVID highs, which you can see in the chart below. The median value of this group of companies was $39B. Today, the median value is $16B.
Market Capitalization Comparison ($B)
Source: CIQ as of 23-Jan-2023.
While the market and multiples will evolve in the years to come, it’s unlikely we’ll be in a monetary policy environment (i.e., low-to-zero interest rates) anytime in the short to medium-term that would enable multiples to bounce back even close to their COVID-era highs. In today’s market, all SaaS companies, both public and private, should plan for 10x ARR multiples to be awarded in the public markets to the strongest performers with the hope that multiple expansion could happen if rates stabilize in the future.
You can access the entire 10x ARR Club Report here.
*Meritech is a current shareholder in Snowflake and Datadog.
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