Venture Capital and Private Equity firms place a higher valuation on companies with recurring revenues. In Q1, software companies with a SaaS model received multiples of seven times revenue while other software companies received a multiple of 6.1.
“Any firm with recurring revenue is extremely attractive to investors,” said Rohit Kulkarni, head of research at SharesPost. “The subscription model translates to greater visibility of revenues, less volatility.”
According to PitchBook Data, Software-as-a-Service deals grew 217% between 2010 and 2016.
“SaaS is a more predictable and reliable revenue stream than if you had to go out and sell the software — the perpetual license model,” said Peter Fair, managing director at Golub Capital LLC.
Michael Larsen of Cambridge Associates said that SaaS models provide a “better measuring stick” as “these companies are moving toward more attractive, more readily transparent ways of selling products and they have attractive, meaningfully recurring revenues.” Employing a SaaS model does not prevent firms from failing but “it creates a more intensely analytical and measurable way of determining how a company is doing.”
For example, subscription firms that employ discounted offers to lure new customers may suffer from churn and see their business model unravel quickly. Subscription length needs to be carefully factored into valuing a firm and estimating its viability.