The Non-Changing Value Of ARR

Morning Report: Happy Monday. Here’s your dispatch from Chartlandia.

For a few years, the Crunchbase News crew has covered the varying price-sales multiples of SaaS companies.

Price-sales is a more pedestrian way of noting a firms “revenue multiple,” or how much money per dollar of revenue  investors are willing to pay for a company.

Follow Crunchbase News on Twitter & Facebook

While that must sound incredibly dull — we understand! — the numbers in question have big import for startups. If the price-sales multiple of modern software companies rises, private software companies are worth more. And if the price-sales multiple of public software companies falls, those same startups probably lose ground.

For startups working to grow into their valuation, having their public analogs expand their revenue multiple helps by lifting some of the load for them. If public analogs are worth more on a per-dollar revenue basis, startups are worth more, too.

So to help us understand private software comps better, we did work tracking the revenue multiple for annual recurring revenue (ARR) across software-as-a-service shops (SaaS) during and after the 2016 SaaS crash. It was a boisterous trip. And as it turns out, we have entered a calm period.

All the above was preamble to something I want to highlight today: we’re heading into the Q3 earnings season now which will see every public software company report their recent performance, allowing for a market repricing. But from what basis is a good question.

That brings us to our chart. Here’s Box’s price-sales multiple (measured on a trailing revenue basis) via YCharts:

There are fun things to point out in the chart, including market enthusiasm for Box shares early in its life as a public company. But observe the steep slide in early 2016. That was the SaaS Crash, when public investors bid down a host of software companies en masse, scaring the hell out of Silicon Valley’s investing class. In the carnage, LinkedIn gave up as a public company, and a number of then-recent IPO looked downright unhealthy.

But, and here’s why we’re talking this morning, observe where Box has traded in a price-sales sense since the latter stretches of 2016: kind of flat. The implication is that Box—a firm that we often use as a living benchmark for SaaS companies— seems to have figured out where it should trade compared to its trailing revenue.

In fact, it almost feels too flat! So consider the above as baseline for the impending earnings season. If your favorite software company gets socked in the face, check its price-sales ratio in the aftermath and ask yourself why it should pick up a higher ARR multiple than Box.¹

1. Of course, do the work: Don’t compare non-recurring revenue to recurring; make adjustments for comparative margin strength, line up growth rates, and caveat from there.

From the Crunchbase Daily:

Texas VC investing hit lows in Q3

• The just-ended quarter was not a good one for Texas startup investment. Third quarter performance hit the lowest point in five years in terms of number of deals reported and dollars raised, according to a Crunchbase News analysis. Funding fell more than 50 percent from the prior quarter.

Wheels Up raises $117M in Q3

• Wheels Up, a membership-based private plane service, has raised $117 million in a late stage funding round led by Fidelity Management and T. Rowe Price. The financing gives the five-year-old, New York-based company an equity valuation around $700 million.

Robot pizza maker Zume raising $48M

• Zume Pizza, a Silicon Valley-based pizza delivery service that uses pie-making robots and oven-equipped delivery trucks, has raised $48 million toward a planned $50 million funding round, according to a securities filing.

Switch shares rise in IPO

• Shares of Switch rose sharply in initial of trading as a public company. The Las Vegas-based data center provider, one of the few profitable tech companies to go public in recent quarters, raised over $500 million in its debut, Crunchbase News reports.