> At the IPO price, it will debut at a valuation of about $2 billion, or almost 15 times last year’s revenue.
Can someone with a classic financial finance background answer this: why do analysts take revenue * multipliers for valuations? Aren't most valuations based on EBITDA * multipliers? Is this just an odd side effect of the numerous tech companies without EBITDA?
Very young, fast-growing companies will often have negative EBIDTA, in part because they are growing so quickly. When this is the case, using a multiple of EBIDTA does not really make sense.
For an older company that is not growing or is growing slowly, an EBIDTA multiple makes more sense.
Makes sense. But for a company that is on the brink of IPO (or recently IPO'd) doesn't this mean they are no longer young or fast-growing, but rather steady, matured and more predictable? (hence opening up to a larger, more public and less sophisticated set of investors)
Some are - some are still very much in growth mode, or on track to be acquired by a larger player for strategic value, both of which can screw with the multiple.
I don't have a classical finance background, but I have started and sold companies that have been valued on revenue and on EBITDA.
Here's my simplified take on it, YMMV:
For companies with high variable costs, you value on EBITDA. For companies with low variable costs, you value on revenue.
Consider a widget maker, each widget he sells for $1.00 costs him $0.65 in materials to make, his margins are 35% per sale. Therefore, it's much better to value his company based on EBITDA, or how effective he is after all of those variable costs that can't be whisked away.
Now, consider a SaaS app maker. She has a variable cost of about $0.03 for every dollar she sells in services, or 97% margin per sale. You'd value based on her revenue, as profits are not constrained by variable costs, but by fixed costs which can be reduced if needed.
Cool, thanks, that was really insightful. One counterpoint about this statement:
> You'd value based on her revenue, as profits are not constrained by variable costs, but by fixed costs which can be reduced if needed.
If we assume that acqui-hires are indeed a model in today's M&A, then doesn't this negate the idea that these fixed costs are fungible (i.e. people) and therefore cost reduction is not possible? Also, I keep hearing this notion that cost of sale goes down in SaaS. This might be true in early to mid stage SaaS, but at mass scale, I haven't seen this to be true.
Acqui-hires have little to do with business fundamentals, and are outside of the scope of this calculation. They're simply measured as "Enough to attract the talent away from their existing venture." Typically in these deals, the core business is shut down and the variable/fixed costs aren't given any relevance.
I'm not sure about there being a hard and fast rule of cost-of-sale in SaaS - I would expect that's largely based on the target customer, enterprise targets are usually going to have a higher customer acquisition cost than consumer targets. Or, by cost of sale, do you mean variable cost? If variable costs approached those of manufacturing in software companies, you'd have to take a hard look at the management and consider replacing them quickly. =)
Well cost of sale in SaaS can be fixed (salary) and variable (compensation + marketing). I'm referring more to companies that have an "Enterprise" tier, or rather at least require Account Executives that are a must to drive sales with higher profile clients. Any company that does make serious money (that would be worth valuing) would IMHO warrant this type of structure (Basecamp and a few others being the rare exceptions to this rule).
> If variable costs approached those of manufacturing in software companies, you'd have to take a hard look at the management and consider replacing them quickly. =)
Having looked at various large SaaS companies (SF, Workday, etc) the variable costs appear to be quite high.
> Having looked at various large SaaS companies (SF, Workday, etc) the variable costs appear to be quite high.
Yeah, I've seen some of that too, but I still think that outside of certain specialized markets and products, that the variable costs shouldn't approach 60%+ on the LTV of a sale. I would also tend to calculate commissions and one-time marketing expenses not only against the first month or payment period, but on the total LTV of the sale.
You use EBITDA or income multiples to value both widget manufacturers and SAAS companies.
Valuations multiples on revenue really only appear for extremely-high-growth companies (read: startups) which are spending an enormous amount on development and/or sales for future revenues. Those high costs render their EBITDA or income a poor indicator of their current success.
(Also, startups tend to have negative income so the earnings would be negative...)
I looked into GrubHub to do online ordering for my mothers deli, after seeing the roughly 25% fee I can safely say that many small business will look elsewhere... eventually.
Hey Mike! Not to blatantly self-promote on HN, but my startup Foodio (http://getfoodio.com) is based around the ideas that GrubHub's fees are insane; restaurants can't wait for their money for a week; and online ordering should promote the restaurant's brand, not a middleman. We charge $295 to build custom online & mobile ordering, and then it's just 5% of sales.
We're a small startup out of Charlottesville, VA, but we'd love to help out your mother if we can! Hit me up at rory at getfoodio dot com if you're interested.
Your choice really depends on your brand. I live in NYC and most of the time that I order food online I just go to Seamless and decide what looks good. There's only been one restaurant that I order from off their own site and that's a pizza place that I love that isn't on Seamless.
If you're a random sushi or Chinese place it's worth the 25% to be in the Seamless directory because otherwise no one will ever order from you. Katz's Deli could probably get away with ordering on their own site because their brand is good enough.
I agree, there's something to be said in many cases for marketing to new customers with those services. But those restaurants should have both- high-fee marketplace services for discoverability, and reasonably priced online ordering of their own for loyal customers and when directing customers online. No restaurant should have to tell people the only way to order online is to find them on a site buried under every competitor in town- unless they pay big extra commissions to float to the top.
They may be on Seamless or Grubhub (both the same company) so that their business may be noticed in the crowded NYC delivery market, but when they can offer a +25% reduction in delivery price by having their own site you will see people using GrubHub as a directory not an ordering platform. What I am getting at is that it is not a sustainable business model, especially because chain restaurants which make up most of the growth in restaurants can afford to make and market their own ordering platform. Also for a small business outside of a "hip" city there is little traction for a service which creates bad faith with customers by jacking up prices, which I've seen can make some people really angry.
Whatever else, the GrubHub guys are impressive entrepreneurs...
Back in about 2006 when they were just starting out, I had a competing site and remember how sh*tty their site was
(even had .jsp in the homepage file extension!); from that to becoming a $2 billion company (granted with Seamless merger)...all hats off to them...
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[ 3.3 ms ] story [ 53.3 ms ] threadCan someone with a classic financial finance background answer this: why do analysts take revenue * multipliers for valuations? Aren't most valuations based on EBITDA * multipliers? Is this just an odd side effect of the numerous tech companies without EBITDA?
For an older company that is not growing or is growing slowly, an EBIDTA multiple makes more sense.
Here's my simplified take on it, YMMV:
For companies with high variable costs, you value on EBITDA. For companies with low variable costs, you value on revenue.
Consider a widget maker, each widget he sells for $1.00 costs him $0.65 in materials to make, his margins are 35% per sale. Therefore, it's much better to value his company based on EBITDA, or how effective he is after all of those variable costs that can't be whisked away.
Now, consider a SaaS app maker. She has a variable cost of about $0.03 for every dollar she sells in services, or 97% margin per sale. You'd value based on her revenue, as profits are not constrained by variable costs, but by fixed costs which can be reduced if needed.
> You'd value based on her revenue, as profits are not constrained by variable costs, but by fixed costs which can be reduced if needed.
If we assume that acqui-hires are indeed a model in today's M&A, then doesn't this negate the idea that these fixed costs are fungible (i.e. people) and therefore cost reduction is not possible? Also, I keep hearing this notion that cost of sale goes down in SaaS. This might be true in early to mid stage SaaS, but at mass scale, I haven't seen this to be true.
I'm not sure about there being a hard and fast rule of cost-of-sale in SaaS - I would expect that's largely based on the target customer, enterprise targets are usually going to have a higher customer acquisition cost than consumer targets. Or, by cost of sale, do you mean variable cost? If variable costs approached those of manufacturing in software companies, you'd have to take a hard look at the management and consider replacing them quickly. =)
> If variable costs approached those of manufacturing in software companies, you'd have to take a hard look at the management and consider replacing them quickly. =)
Having looked at various large SaaS companies (SF, Workday, etc) the variable costs appear to be quite high.
Yeah, I've seen some of that too, but I still think that outside of certain specialized markets and products, that the variable costs shouldn't approach 60%+ on the LTV of a sale. I would also tend to calculate commissions and one-time marketing expenses not only against the first month or payment period, but on the total LTV of the sale.
Valuations multiples on revenue really only appear for extremely-high-growth companies (read: startups) which are spending an enormous amount on development and/or sales for future revenues. Those high costs render their EBITDA or income a poor indicator of their current success.
(Also, startups tend to have negative income so the earnings would be negative...)
We're a small startup out of Charlottesville, VA, but we'd love to help out your mother if we can! Hit me up at rory at getfoodio dot com if you're interested.
If you're a random sushi or Chinese place it's worth the 25% to be in the Seamless directory because otherwise no one will ever order from you. Katz's Deli could probably get away with ordering on their own site because their brand is good enough.
Back in about 2006 when they were just starting out, I had a competing site and remember how sh*tty their site was (even had .jsp in the homepage file extension!); from that to becoming a $2 billion company (granted with Seamless merger)...all hats off to them...