TL;DR: Mulesoft’s recent IPO sports a high revenue multiple that could help startups defend their valuations.
Mulesoft, an enterprise-facing technology company, raised $221 million last Friday after pricing its IPO at $17 per share, above its expected range.
After Mulesoft had priced, Business Insider reported that it was worth $2.9 billion (fully-diluted), up from its last-private-valuation of $1.5 billion.
The company has appreciated from the $17 mark. As Crunchbase News reported on Friday, Mulesoft’s “opening bid [as a public company] was $24.25 per share, up 42.6 percent.” The company closed at $23.40 today, down just under 5.5 percent.
That share price means that Mulesoft’s worth more than its $2.9 billion IPO result. Google Finance, Yahoo Finance, CNBC, and others have incorrect or missing information for Mulesoft’s current market capitalization — traditional for new offerings — but simple math gives us a working valuation for the company of $3.99 billion (directional corroboration here; fully-diluted result).
Call it $4 billion.
Revenue Multiples In Practice
Why do we care about what Mulesoft is worth today? Because Mulesoft’s valuation matters as it helps set benchmarks for similar companies that are either looking to raise more private capital or go public.
That means Mulesoft’s very successful IPO will likely help other enterprise-facing startups raise new capital or move towards a flotation of their own.
But perhaps even more importantly, Mulesoft’s IPO result gives us new revenue value metrics.
Over the last year or so, private and public investors dramatically repriced the value of recurring revenue. Software as a Services (SaaS) companies, an incredibly popular business model among modern software companies, create recurring revenue by the bucket. If the value of recurring revenue declines, so too does the value of the companies creating it.
That fact makes public pricing events for recurring revenue critical to understanding today’s technology scene. If companies looking to go public price below their last private valuations despite growing their recurring revenue it shows the market has changed its mind on what enterprise-SaaS companies are worth. In that case, SaaS startups looking to take on fresh capital may have to do so at a lower, more punitive valuation or put off raising all together until market conditions improve.
But if a company with recurring revenue posts strong valuation numbers, it can raise the value of recurring revenue, lifting all SaaS boats.
With that in mind, let’s get back to Mulesoft.
In 2016, Mulesoft recorded $187.75 million in revenue, of which $152.84 million was listed under the “Subscription and support” line item, our best working cognate for recurring revenue at the firm. The now-public enterprise unicorn also collected $34.90 million in services revenue during the same period.
To understand the value of Mulesoft’s revenue on a per-dollar basis —a tool that we can use to understand still-private startups in the enterprise space — we will use its full revenue complement instead of a tranche of the whole. It’s a slightly messy way to calculate a revenue multiple when we care most about recurring revenue, but many SaaS companies have professional support revenue mixed into their top line. As long as we are consistent on this point, we won’t get too far over our skis.
(Note: We could create a model that parses out services revenue using margin calculations, but, in the process, we’d be more financial mathamagicians than anything else. We’ll leave that to the real nerds.)
All of this means it is possible to calculate a revenue multiple for Mulesoft. With moderate confidence, we can use that revenue multiple to roughly benchmark what SaaS companies are worth—given that the startup profile matches Mulesoft in terms of growth and margin performance.
You can do the math quickly: At a valuation of $4 billion and a revenue result of $187.75 million, Mulesoft currently trades at a revenue multiple of 21.30.
2017 Is No 2016
The Mulesoft revenue multiple is high.
There are few reasons for that which rest on Mulesoft itself. Not all SaaS companies will have such strong results in-hand when they file to go public. Mulesoft had a number of strong indicators on its side, including a 70.3 percent growth rate year-over-year, falling GAAP losses, and over $100 million in cash.
So we should not expect every company going public to have those same quality level of results. That implies that Mulesoft’s revenue multiple post-IPO is on the higher side of the hill. At the same time, even at the prior $2.9 billion valuation calculated using its $17 IPO share price, the firm sold new equity at a revenue multiple of over 15, which is high as well.
(Homework: Using Mulesoft’s S-1 results as best you can, calculate a rough approximation of Mulesoft’s 2015 revenue multiple employing its May 2015 $1.5 billion post-money valuation. What can that tell us about how hungry public investors are today?)
Bear in mind that nearly exactly one year ago today, the value of annual recurring revenue (ARR, roughly what we have discussed regarding Mulesoft) on a forward basis had fallen from 7.7x to 3.3x into the 2016 trough that spooked Silicon Valley. Mulesoft is trading for far and away more than those levels. So, it’s bullish.
Summing quickly, the Mulesoft IPO is an encouraging event for a host of enterprise-focused tech startups that have raised buckets of cash from investors both traditional and not. If the soon-to-follow IPO flood can keep the momentum going, we could see a portion of illiquid unicorn blood finally start to flow.
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