We’ve spent a lot of time over the years here at Crunchbase News looking at the value of revenue. In that category, we’ve spent most of our time exploring the value of revenue from software companies.

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Software, mostly now sold through the software as a service model (SaaS), is a key component of high-growth private companies, especially those that have raised from private investors (startups). So SaaS revenue, a subset of software revenue writ large, matters.

This morning I want to take a moment to look at some companies in the SaaS space that are currently among the most richly valued companies in their space. We’re turning back to the Bessemer cloud index to examine the highest-valued public SaaS companies. By looking only at the most richly-valued we can understand what’s currently in-vogue amongst public investors.

When we’re done we’ll have a list of qualities that startups still on the make can aim for when they reach scale. It’ll be fun, let’s go!

20x Or Bust

Bessemer’s index, officially dubbed “,” provides a number of useful metrics along with its aggregated data on public cloud and SaaS companies. Things like this year’s enterprise value divided by revenue, trailing free cash flow margins, and run rate revenue growth (in percentage terms), along with gross margin.

As these are our favorite things, we pulled the numbers from every company on the list with a current enterprise value (a metric similar to market capitalization) of 20 times or greater than its expected 2019 “run rate revenue,” to use the officially listed term. Then we simply averaged the metrics from each company that made the cut (²Ô´Ç³ÙÌýweighted by market cap or revenue scale, let’s be kind to ourselves on a Monday) to get aggregate results from the small cohort.

Thus, amongst the eight companies trading richly enough to meet our criteria:

• EV / 2019 Run Rate Revenue: 26.3x
• EV / 2020 Rev: 20.3x
• LTM FCF Margin: 19 percent
• Run Rate Revenue Growth: 48 percent
• Efficiency: 66 percent
• Gross Margin: 73 percent

Efficiency, in case you don’t have an , is a calculation of a company’s free cash flow (FCF) margin plus its growth. So, if you had a 5 percent FCF margin and, say, 35 percent growth, you would earn an efficiency score of 40. Quoting Bessemer, “for the average public company a few years after IPO, an Efficiency Score above 40 is considered great.”

So “Efficiency” is similar to , but different. (Kinda. A lot of folks run Rule of 40 calculations using FCF margin instead of, say, adjusted EBITDA margins let alone GAAP net income. Anyways.)

We now have our metrics. Summarizing, the most richly-valued public SaaS and cloud companies in revenue terms have FCF margins of around 20 percent, grow at about 50 percent, have very strong efficiency scores, and sport somewhat average gross margins.

The only surprise in the data was that final result; it was easy to presume that the SaaS companies with the strongest revenue multiples would sport higher average gross margins. Anyway, if you are a startup, you know where you want to aim when you reach scale. How big? The average company in our shortlist has a market cap of $17 billion.

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Public cloud and SaaS companies, which have enjoyed a massive run-up in value in recent years, have fallen more sharply than tech stocks more generally. These recent price changes could slow the IPO pipeline, and possibly reprice private rounds into related private companies.

Down

Today is not the first time we’ve covered a negative gyration in the value of tech stocks. Indeed, you can read a few previous examples here from 2018 and here from 2017.

However, what’s notable in today’s down market is the sharpness of the retreat and the lack of positive news on the horizon. As analysts , it appears that things could get worse before they get better. Thinking narrowly to certain tech shares, the situation could limit short-term upside to stocks valued more on growth than profit fundamentals.

The market pain is not evenly distributed. At the time of writing, the Dow Jones Industrial Average and the S&P 500 are each down about 2 percent. The Nasdaq is off around 2.7 percent. And the Bessemer-Nasdaq cloud index of SaaS stocks is off 3.9 percent.

The damage is similarly varied as we zoom out. When we compare the Nasdaq and the Bessemer cloud index to their recent highs (also their 52-week highs, and all-time highs, for those keeping score), the Nasdaq is off 6.6 percent. That’s a steep decline in just a few trading sessions. However, cloud stocks in the Bessemer-demarcated basket are off a sharper 10.3 percent.

In stock market terms, a 10 percent price change is called . SaaS and cloud stocks are, therefore, in correction as of today compared to their recent highs.

From Highs, Lower Highs

It’s perhaps not panic time yet for cloud and SaaS companies who are public, and therefore not yet time for alarms among their private-market comps.

Why? Because SaaS and cloud stocks are trading at record highs, and at record valuation multiples. Indeed, as of the time of writing, still notes on its website that the stocks that make up its index are trading for historically high revenue multiples:

That’s still more than healthy. Indeed, when it was 10x, that was quite robust. Even, I’d argue a 9x enterprise value (EV) revenue multiple would be strong. Shifting a lot of stocks from an 11x average to a 9x average would involve pain, but the market would still be healthy for SaaS and cloud companies.

So what we’re seeing today is a correction, yes, but from very, very good to merely very good. If the declines continue, however, the situation could go from worrisome to bad quite quickly. And for private companies looking to defend their valuation and raise more money, neither situation is good. You don’t want market doubt when your valuation is illiquid.

Illustration: .

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The selloff comes after and posted disappointing IPO results and the tech sector itself has come under increasing regulatory scrutiny. News that and could come under anti-trust scrutiny in the United States spooked investors, worried that regulators could crack down on profitable enterprises or even break up platform players.

But while the big shops are driving the big headlines, one slice of tech that we track carefully had a particularly bad day. Let’s talk about SaaS.

Trending Down

Software-as-a-service companies, better known as SaaS shops, have found favor with public market investors for building high-margin, recurring revenues. Investors covet the firms as their revenue is high quality and dependable. That means that they have high revenue multiples, or, more simply, that they are worth more than most other companies per dollar of revenue that they record.

It is unsurprising then, that, over time, SaaS companies have done well. The continued rise of , the recent Zoom boom, and other SaaS-y players’ successes have been impressive. Indeed, SaaS stocks’ performance has been so strong that every company going public wants to mimic their revenue multiples, .

Tracking that success, long-time Crunchbase News readers will recall, is Bessemer’s new cloud index, an effort with the Nasdaq to keep a good eye on the market for SaaS stocks.

Here is what is put up today, in terms of points:

In chart form, inclusive of today’s trading, this is what it looks like:

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This morning Ìý²¹²Ô»å ‘BVP Nasdaq Emerging Cloud Index’ tested new highs as modern software companies found favor among public investors.

The Emerging Cloud Index, formerly known as the Bessemer Cloud Index, tracks a basket of public software companies that sell their products largely on a recurring basis; the so-called ‘software as a service’ model, or SaaS, is a popular way among tech companies big and small to vend their wares.

No matter which direction the Emerging Cloud Index moves, the benchmark provides valuable insight concerning market sentiment regarding companies of their ilk. Companies like many startups in the market today. And, companies that have shed their startup badge and are looking towards the public markets too. Slack is the latest example; the popular workplace communication tooling shop intends to debut this quarter in a direct listing, allowing its equity to trade without a traditional, priced share-sale.

Today the Emerging Cloud Index rose over 1,204 before retreating slightly. The same basket of stocks was worth far less during the December fear period, falling under 780 points before recovering. In recent weeks, the index has found itself stuck around the 1,100 mark; cresting further into the 1,200 territory is notable.

But the impact of the index’s rise won’t land on only Slack’s doorstep. Public market sentiment filters into the private market, influencing valuations and investing trends. (This is simple to understand: If the public markets reward one group of tech companies with rising valuations, private market investors may infer that investments into that area may have greater chances of a lucrative exit. The reverse also works.) This means that private SaaS companies could have a decent Q2 when it comes to raising capital and the like, though the connection between public and private markets is hardly instantaneous.

It’s a pretty good day for SaaS. We ‘ll continue to highlight peaks like this, and valleys when they eventually come.

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If Lyft doesn’t make it out in the first quarter, the technology industry’s IPO cadence in the first three months of the year will wind up terribly small and underwhelming. Yes, there are some fair reasons for the result, but it’s still a let-down of a start for a year that was supposed to bring a wave a new technology debuts.

Tell Me Why

Offerings are slim. We have very little on our 2019 IPO tracking post, and what’s there isn’t the sort of brand-name debut that drives excitement. This year is supposed to be the annum during which a host of famous unicorns and decacorns, like Uber and Slack and Pinterest, find their way out of the private markets and into the public.

A good question then is why. Why have IPOs been so lackluster thus far this year? A few reasons. The government shutdown did cause chaos. That slowed things down. And, trade worries and political upheaval at home and abroad led to jitters and the like. IPOs don’t like jitters and the like. But it’s not like the bottom fell out of anything (aside from a functioning Securities and Exchange Commission, for a while), and yet ²õ³Ù¾±±ô±ôÌýeffectivelyÌýno one made it out.

So let’s not be too generous and let the now-reversed government shutdown answer for all the disappointment. After all, there was much that was good in the quarter for potential offerings:ÌýThe public markets were strong, for example. Writing to you today in the last weeks of March, the Nasdaq is back over 7,600, the Bessemer Cloud Index is trading near record-levels, and valuation multiples look healthy.

That’s the sort of pool you want to jump into if you are a budding technology giant, looking to get your investors and founders and employees liquid through a public offering. (There’s no guarantee that the markets will remain as accommodating in the coming quarters, so you often want to get out while the getting is good.)

We’ll see what happens during the last two weeks of March, but as it stands, we’ere one quarter down and still sitting near zero on the technology IPO count.

Illustration: Li-Anne Dias.

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According to a key index, public SaaS companies are once again worth around ten times their revenue as their share prices recover from December’s disturbance.

The 10x figure is . For startups, the return to form is good news; higher public-market multiples for SaaS companies boost private market comps as venture investors measure younger companies up to their public siblings.

The valuation news isn’t the only good news for SaaS companiesÌýout today. The same SaaS-focused index is also testing record highs of its own.

10x, Again

Back in August of 2018, the companies that then made up the Bessemer Cloud Index posted a 10x revenue multiple comparing 2018 revenue against enterprise value of the companies counted. As we reported at the time, that figure fell to 8.2x when looking out into 2019.

Since then, as noted ad infinitum, , a venture shop, rejiggered its cloud index in partnership with Nasdaq so that we can track it daily. This morning, two things stood out:

1. The newly re-christenedÌýBVP Nasdaq Emerging Cloud Index set an all-time high of 1,074.72 points (Annoyingly, Yahoo Finance can’t load historical data for the index; Google gave up on its Finance tool as having a functional financial website was apparently too hard; MarketWatch doesn’t track the index so far as we can tell; and the Nasdaq site for the collection doesn’t have 52-week highs and lows. My god, Internet. Anyway, we hand-picked through historical data .).
2. According to the index’s homepage on , it now sports a revenue multiple, using enterprise value instead of market cap, of 10.2x.

I have an email over to Bessemer asking for clarification on the multiple to confirm that it’s a trailing revenue figure instead of an ARR result. I’ll update when I hear back. Returning to the raw figure, we’re a bit higher than we were before, but I am loathe to say that the 10.2x figure is itself an all-time high; we’re close at least.

There is a connection between public market activity and the private market. It’s not perfect, but the rising valuations of public SaaS companies will do two things for startups in the space. First, it drives positive sentiment about SaaS startups as a group, making them more attractive as possible investments. And it also helps individual companies defend prior valuations and secure a higher worth in their next round.

As we noted last week, it’s hot times once again in SaaS. Eventually, a public market wobble will turn into a sustained public market correction, and then we’ll see what happens to SaaS when . For now, it’s back to summer.

Top Image Credit: .

It’s in Silicon Valley and the stocks of modern software companies are acting like it. According to the BVP Nasdaq Emerging Cloud Index, the recently re-named basket of cloud and SaaS stocks that we use as a barometer for market sentiment regarding the category, things have never been better.

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Indeed, it appears that the Cloud Index set a new all-time high today. Given the youth of the reformed stock collective, it’s hard to say if the index across its various incarnations reached an all-time high, but if not the metric is incredibly close to doing so.

Per Bessemer, the paints the picture of SaaS and cloud stocks being a hair off of their record closes, at most:

All this goes to say that the fear has been squeezed out of the market, at least as it pertains to the companies that fit under the cloud rubric. The largest tech companies have not recovered as much as smaller-cap software shops.

For startups, the return-to-form means that public comps are winsome again, and revenue multiples likely back to where they were before December’s unsettling Brief Period of Concern. For investors, the exit possibilities of their investments have perked back up; since public SaaS shops are trending up, so too are expected values of startup M&A and IPOs.

It’s no surprise then, that Slack recently filed to go public. The well-known company will shoot for a stiff revenue multiple it seems, which it may manage given its history of quick growth and apparent efficiency. But if the market had kept falling as it did as 2018 came to a close, what reason would Slack have to go out when it didn’t need the cash, and might have to float at a down valuation? Little.

The good times are back. Again. As they have returned every time that I can recall. Eventually, things won’t snap back. Perhaps the next time. But not this time.

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On Nov. 28, , an enterprise-focused cloud storage and productivity company, its fiscal third quarter, 2019 earnings after the bell. The Bay Area-based company beat expectations regarding revenue ($155.9 million, versus $154.6 million anticipated), and per-share losses ($0.06 adjusted, versus $0.07 anticipated).

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Shares of Box were up during the day before the report and in after-hours trading.ÌýBox also raised the top end of its forecast for its current fiscal year (2019) “to $609.2 million, from $608 million,” . And its CEO that the company is on itsÌýway to “$1 billion in revenue.”

Notably, Box isn’t alone in seeing its value appreciate. The surprisingly dynamic Bessemer Cloud Index that was recently remade into a daily ticker shows a similar rebound in cloud stocks in recent days. The Cloud Index fell into the 780s (it started at 1,000) in the middle of November, before rebounding to nearly 890 before the start of trading today. That’s quite a jump in about 10 calendar days.

So, after a somewhat dispiriting decline that matched what other stocks in the market were doing, more or less, cloud is nearly back to where it was earlier in the year. Which is to say a bullish position.

So What?

Why are we looking at a public company’s earnings report, and an index of public cloud companies? After all, we focus on private companies here at Crunchbase News. We are examining Box as it’s an important example of an SaaS startup that raised lots during the unicorn era and went public on the strength of its recurring revenue growth, rather than its profitability. The firm has since started generating cash quite often (measured quarterly) and expects to turn in non-GAAP per-share profit in the period roughly aligning with calendar Q4.

So, it makes for a good example. If Box does normal SaaS things, and the markets bid its shares down, it’s an indicator of where sentiment is heading; that impacts private companies as public comps impact private valuations.

The same principle applies to the basket of cloud stocks we mentioned before. If they fall sharply, private investors take note that public investors are revaluing the sort of company that they are putting capital into; if analogous stocks go bearish, startups grow fur.

So! All that said, let’s think about what Box is worth today, compared to its current revenue. We’ll get a workable revenue multiple out of the exercise, which we can then use as a general metric for thinking about what sort of recurring revenue modern software companies (which nearly all uses software-as-a-service as a business model, like Box) need to grow into to make their trailing valuations fit.

Cool? Great.

Box’s revenue figure doesn’t break out recurring incomes (its core products) from non-recurring services income. As such, we generally treat its revenue as a single lump when we want to calculate a recurring revenue figure. This distorts the resulting figure somewhat, but don’t let it worry you, we’re shooting for close here, not exact.

With $155.9 million in top line, our analog for Box’s annual recurring revenue figure comes to $623.6 million. Box was worth $2.57 billion before the start of trading today,Ìý. Simple division gives us a current ARR multiple of 4.12.

That’s a somewhat low multiple, compared to other companies and figures that we have seen this year. However, with Box growing just over 20 percent year-over-year in its most recent quarter, the company is likely paying a revenue-multiple tax. The faster your ARR growth, mostly, the higher your revenue multiple will be.

Returning to our notes on Box’s public market performance, Box is trading lower than it did at the start of the year, and far under its early-summer highs. If that is attributable to its slowing growth I can’t say for sure, but I suspect it’s at least a few pieces of the puzzle. The lesson in this earnings report is that growth remains as critical to SaaS valuations as it has been; Box’s slowing growth rate’s impact wasn’t sufficiently erased by rising profitability at the company. Its value has therefore fallen in revenue-multiple terms.

And that brings me to my final point. I’ve thought about retiring Box as our regular ARR benchmark a few times, mostly because Box is now so much larger than private market SaaS companies that its maturity makes it an increasingly poor comp. But what we didn’t have, until recently, was something good to use in its place.

But the new Cloud Index probably fits the bill, even though it doesn’t provide similarly granular multiples. Still, given that it is a basket of SaaS stocks, it’s probably a healthier way to stack public sentiment against private companies.

So, I hereby commit to not covering Box’s next earnings report, at least here. It’s probably no longer sufficiently pertinent.

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Just a few months ago, software-as-a-service (SaaS) companies and other public firms that provide cloud-based products were flying high. Their stocksÌýwere sharply higher than the popular American indices, and companies in those categories enjoyed high revenue multiples.

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Now, as the broader market hits turbulence into the Q3 earnings season, those same cloud companies are pulling back.

Here’s what the (now theÌýBVP Nasdaq Emerging Cloud Index), which tracks SaaS and cloud stocks’ performance over time, looked like in recent days:

Blue: Cloud Index. Red: Nasdaq Index. Green: S&P. Purple: DJIA. The chart begins in August 2013.

That’s a pretty severe drop! And, the recent downturn seems to be the largest in raw percentage terms of any we’ve seen since the 2016-era SaaS crash (that’s the point where the Cloud Index falls under the other lines about mid-way through the chart).

But while I would love to call for panic, I think what we’re seeing instead is some froth blow off the top of the SaaS market. Of course, if the broader market corrects further, we could see the SaaS market dip even more.

But certainly, everyone knew that this was going to happen at some point. If historical SaaS multiples were considered fair when they were in the low single-digits, revenue multiples as high as 10x weren’t going to last.

SaaS and cloud revenue multiples could fall by half and still be fairly valued by some historical models. Perhaps drops in individual stocks wouldn’t be that extreme, as the companies in question would grow during their declines, adding to their revenue base and thus blunting their value drop. Some.

The stock market can correct faster than any one company can grow, however.

We don’t call tops here at Crunchbase News, but we’re seeing some signs that the Never Ending Bull Market might be losing steam. For startups that depend on public-market comps to help value themselves, this is big news (more on that here).

Happy Wednesday!

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Earlier this week , a well-known venture crew, announced several updates to its Cloud Index. The new tool has useful features like real-time updates, but it has shed some of its usefulness along the way.

Index 1.0

The original index tracked a basket of public, cloud-centric software as a service (SaaS) companies. It provided quick updates on the market’s feelings towards a number of tech’s growing players.

At a glance, the index could tell you if investor sentiment was rising or falling for public cloud companies, many of which were still firmly in their growth era. Even more, the Index helped this publication keep tabs on startups that worked in SaaS or cloud areas.

If the index went up—stretching certain financial metrics that private and public investors track—we could infer that fundraising activity for analogous startups was likely to be warm. Also, higher valuations for public cloud and SaaS companies also trickle backwards into the private market. This impacted companies that later needed to go public, as sometimes their public valuation could leave reality, setting up later fundraising and pricing issues for the startup.

The index was a tool that helped Crunchbase News understand private companies, private companies on their way to going public, and public companies—all at the same time.

Index 2.0

The new Cloud Index, properly known as theÌý“,” tracks a slightly amended set of companies.

Per , here’s how it was changed:

“There are a number of companies in the BVP Nasdaq Emerging Cloud Index that were not part of the BVP Cloud Index due to the new index’s refined eligibility requirements. For example, Adobe is included in the initial index given that it has masterfully transitioned to a cloud company, and 2018 cloud IPOs DocuSign, Dropbox, Zuora, and Zscaler have been included as well. Additionally, given the partnership with Nasdaq, we believe the new benchmark will be even more reflective of the sector’s performance as the index will be calculated on an equal-weighted basis and employ Nasdaq’s index maintenance and rebalancing standards.”

Don’t worry about the phrase “equal-weighted.” It just means that each company’s stock in the index has the same impact on the basket as any other. As a result, larger, more valuable companies don’t carry more heft.

Now here is the good and the bad.

• The good: The new Cloud Index updates in real-time. This is useful for you and I as it means that we don’t have to wait for bi-monthly updates to the Bessemer-provided chart.
• The bad:ÌýBessemer previously provided a set of useful metrics for the collected companies, such as cash flow and next year’s revenue divided by current enterprise value. Those figures were laid out with median, and mean numbers, and more. Now those features are gone. Now Bessemer nor the Nasdaq list the figures.

So now we have a far better cloud and SaaS public market pulse; however, the financial summations we will have to do ourselves. Nothing in life that is worth having is free. Or perhaps that’s not true, but it applies in this case.

We’veÌýcited the originalÌýindex just a few times over the past few quartersÌý²¹²Ô»å expect to keep it up. Happy charting, everyone!

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