How to value a partnership between 2 SaaS companies
SaaS valuations = nightmare. To value the synergies between two SaaS companies working together = the 9th circle of Dante’s Infierno.
Still, we can use some starting points.
The whole purpose of the SaaS model is to shorten the sales cycle and make the company grow faster. So growth rate is the key.
Profitability does not matter. SaaS companies are product-oriented companies, not process-oriented. (like most tech companies)
A product-oriented company just wants to get a solution to market as fast as possible, whether efficiently or inefficiently. Process-oriented companies, such as say infrastructure or retail, worry about efficiency, because they work with an already proven, mature, and existing industry.
So here is a table of revenue growth rate and multiples, based on the very useful blog posts from Point 9, SaaS Capital, and others.
So the question we want to ask when two SaaS companies partner is how much the partnership multiplies or accelerates their growth rates.
To do a simple calculation, two SaaS companies of $6Mn forward revenue each decide to work together. They are growing each at 50% p.a. Each will be valued at $36Mn (6x)or $72Mn combined.
They make a partnership to cross-sell each other’s services to the same customer. This might accelerate their growth rate by a factor of 1.2x or 60% p.a. This will boost forward multiple to 7x. And their next year revenue each will be $6.4Mn. That is approximate a valuation of each at $45Mn or $90Mn combined.
So it is $18Mn of value generated from the partnership, assuming a 1.2x multiple to revenue growth rate from the partnership. Assuming it is shared equally, it is about $9Mn each.
This is overly simplistic, but can be a starting point for discussions.
Questions for everyone:
- Does this off-the-cuff calculation technique make sense?
- Is it useful for determining whether two SaaS companies should enter into a partnership?
