What do public SaaS multiples mean for your company in 2024?

In 2024, as SaaS evolves, understanding multiples is more crucial than ever. 

But what do public SaaS company multiples mean? More importantly, what insights can they provide to help you boost your revenue in 2024?

In this guide, we’ll answer those questions and cover the following topics:

• The importance of public SaaS multiples in 2024
• How to calculate public SaaS multiples
• A quick look at trends in SaaS multiples for 2024
• The impact of public SaaS multiples on private companies
• Implications for investors
• Considerations for SaaS company leaders

Let’s get started. 

What are public SaaS company multiples?

Public SaaS multiples are a key metric. They compare a company's enterprise value to its revenue, often using the EV/Revenue ratio. This ratio offers a snapshot of how the market values an organization’s future potential.

Founders can use them to set realistic expectations for valuations and fundraising. Investors can compare companies and identify potential winners. In other words, tracking multiples helps you stay ahead and understand this dynamic market.

How to calculate public SaaS multiples

We've established what public SaaS multiples represent. Now, let's dive into the mechanics of their calculation:

The EV/Revenue ratio

The cornerstone of SaaS valuation is the EV/Revenue multiple. It's a simple yet powerful ratio that tells us how much the market is willing to pay for each dollar of a company's revenue.

The formula is straightforward: EV/Revenue Multiple = Enterprise Value / Annual Revenue.

Let's break down the components:

• Enterprise Value (EV): This represents the total value of a company. It encompasses its:
  • Market capitalization: This is the value of its outstanding shares.
  • Net debt: This value is total debt minus cash and cash equivalents. 

Essentially, it's what it would cost to acquire the entire company.

• Annual Revenue: This is the company's total revenue over the past twelve months. You’ll also find it as trailing twelve months or TTM revenue. It reflects the company's top-line performance, showing its ability to generate sales.

The role of growth, profitability, and the rule of 40

The EV/Revenue multiple provides a basic valuation yardstick. However, it's not the sole determinant of a SaaS company's worth. Two other critical factors come into play:

• Growth rate: The faster a SaaS company grows its revenue, the higher its multiple tends to be. Investors are willing to pay a premium for companies with strong growth prospects. This happens because they anticipate greater future cash flows.
  ‍
• Profitability: Companies with healthy profit margins and good cash flows tend to have higher multiples. They prove they have a sustainable business model.

The "Rule of 40" is a measurement that captures the interplay between growth and profitability. It states that a healthy SaaS company's growth rate plus its profit margin should ideally exceed 40%. Companies that surpass this benchmark tend to have higher valuations. 

Decoding SaaS valuation multiples in 2024

In 2024, the SaaS industry is witnessing a shift in focus towards profitability. 

Growth remains essential, but there's been a change. Investors are analyzing companies' ability to generate sustainable profits more than before. This has led to a recalibration of SaaS revenue multiples and SaaS valuation multiples.

In short, when analyzing public SaaS multiples, it's vital to consider those three elements: The EV/Revenue ratio, the company's growth trajectory, and the profitability profile. 

Trends in SaaS multiples for 2024

The SaaS landscape in 2024 is showing a mix of resilience and recalibration. Let's explore the key trends shaping SaaS multiples this year and how they compare to previous periods:

A return to reality

After reaching dizzying heights in 2020 and 2021, public SaaS multiples have come back down to earth. 

The median EV/Revenue multiple for public SaaS companies has settled in the 6-7x range, a far cry from the heady days of 20x or even 30x multiples. This "return to reality" reflects a broader market correction and a renewed focus on fundamentals.

The profitability imperative

One of the most striking trends in 2024 is the growing emphasis on profitability. Investors are no longer content with high-growth, cash-burning SaaS companies. 

They're demanding evidence of sustainable business models and healthy profit margins. This shift has led to a bifurcation in the market. Now, profitable SaaS companies are commanding higher multiples than their unprofitable counterparts.

External factors at play

Rising interest rates have made investors more cautious and less willing to pay a premium for future growth. The uncertain macroeconomic environment and looming recession fears don't help either. They've further dampened enthusiasm for high-flying tech stocks.

On the positive side, the growing adoption of AI is creating new opportunities for SaaS companies. Those who can integrate AI into their products and services can get higher multiples. Projecting potential for innovation and disruption is more important than ever. 

How public SaaS multiples impact private companies

For private SaaS companies seeking to raise capital, public multiples cast a long shadow. Venture capitalists often use public market valuations. Why? It helps as a benchmark when assessing the potential of private companies. 

A buoyant public market with high multiples can create a favorable fundraising environment. This happens because investors are more willing to bet on the future growth of private companies.

Conversely, a downturn in public SaaS multiples can make fundraising more challenging. Investors become more cautious and demand greater evidence of profitability and growth.

Strategic planning with public SaaS multiples as a guide

Beyond fundraising, public SaaS multiples can guide private companies' strategic planning. They first need to understand the prevailing market trends and valuations in order to make better decisions about their growth strategies and pricing models. 

For example, if public multiples are high, a private company might accelerate its growth plans. They might be aiming for a lucrative IPO or acquisition. 

On the other hand, if multiples are depressed, the company might focus on improving profitability. The pressure would be on building a more sustainable business model.

What are the implications for investors?

For investors, public SaaS multiples a compass. They guide investors toward lucrative opportunities and help them avoid overvalued ventures. Here’s a closer look at how public SaaS multiples help investors:

Benchmarking and comparison

At their core, SaaS multiples provide a standardized way to compare the valuations of different companies.

By examining the EV/Revenue multiples of various SaaS companies, investors can gain insights into how the market perceives their growth potential, profitability, and overall business models. 

This allows for a more apples-to-apples comparison. Assessment is easier, even across companies in different niches or at different stages of maturity.

Risk assessment and due diligence

SaaS multiples also play a role in risk assessment. This bears repeating: 

• A company with an exceptionally high multiple might signal that it's overvalued. This could potentially expose investors to greater downside risk.
  ‍
• The story is different for a company with a low multiple, especially if it's accompanied by strong fundamentals and growth prospects. This could represent an undervalued opportunity.

The key for investors is incorporating multiples into their due diligence process. This way, they can make more informed decisions about where to allocate their capital.

Identifying market trends

Tracking SaaS multiples over time can reveal broader market trends.

Are multiples expanding or contracting? 

Which sectors or business models are commanding premium valuations? 

Finding answers to these questions can help investors identify emerging opportunities. This, in turn, helps them anticipate shifts in market sentiment.

Considerations for SaaS company leaders

As we’ve stated, public SaaS multiples are key market indicators. For SaaS leaders, they’re also a strategic compass. Let's explore how understanding these multiples can position your company for success:

Pricing strategies

While public multiples can offer a reference point for pricing, SaaS leaders should dive deeper. Yes, it’s about charging what the market will bear. But it's also about aligning your pricing with your value proposition and target customer segments. 

Here are some tips:

• Analyze your competitors' pricing and their corresponding multiples. This can help you identify potential gaps in the market and opportunities for differentiation.
  ‍
• Consider the value your product delivers to customers. Are you solving a critical pain point or offering a unique feature set? If so, don't be afraid to price accordingly, even if it means exceeding the average market multiple.
  ‍
• Consider different pricing models and tiers. You'll want to find the sweet spot that maximizes revenue while maintaining customer satisfaction. Remember, a loyal and engaged customer base is invaluable in the long run.

Aligning with market expectations

The current market climate demands a clear path to profitability. SaaS leaders need to show that their growth strategies are sustainable. They need to show how they intend to create positive cash flows in the foreseeable future. 

Here are a few tips for SaaS leaders on this front:

• Scrutinize your cost structure and identify areas for optimization. Are there any inefficiencies or redundancies that you can eliminate?
  ‍
• Re-evaluate your customer acquisition and retention strategies. Are you focusing on high-value customers with low churn rates?
  ‍
• Consider alternative funding options beyond venture capital. Think debt financing or strategic partnerships. These can provide the capital you need to grow without sacrificing equity or compromising your valuation.

Public SaaS multiples offer valuable insights, but they're just one piece of the puzzle. SaaS leaders need to adopt a holistic approach. Considering their unique value proposition, target market, and competitive landscape is a must. 

By aligning your strategies with market expectations and demonstrating a clear path to profitability, you can position your company for success in the long term. 

This is even possible regardless of the fluctuations in public SaaS multiples. 

Remember, building a sustainable and valuable SaaS business will sometimes also require chasing high multiples. It also demands a focus on delivering real value to customers and creating a robust business model that can withstand the test of time.

Beyond multiples: Orb’s role in helping SaaS companies thrive

We've explored the intricacies of public SaaS multiples, their trends, and their wide-reaching implications. Now, it's time to translate this knowledge into action.

Are you evaluating your SaaS multiples to prepare for a funding round, strategize an exit, or simply benchmark your company's performance?

That's where Orb steps in.

Product leaders at industry-leading companies like Perplexity and Vercel turn to Orb to build a pricing engine that supports their growth ambitions and aligns with market expectations.

With Orb, you can:

• Craft the ideal pricing strategy: Experiment with various pricing models. Orb lets you analyze usage patterns and fine-tune your pricing to maximize revenue and customer lifetime value.
  ‍
• Show profitability potential: Gain real-time insights into your financial performance. Orb enables you to showcase a clear path to profitability for investors and stakeholders.
  ‍
• Unlock data-driven decision-making: Leverage granular usage data to identify upsell opportunities. Orb helps you optimize pricing tiers and make better strategic decisions.

In SaaS, multiples are a reflection of your company's potential. With Orb, you can build a pricing strategy that supports growth and enhances your company's valuation.

Ready to discover the full potential of your SaaS pricing?

Schedule a demo with Orb today.