Over the last 15 months, the typical high growth public SaaS company's multiple has halved. The chart above plots the average enterprise value to forward revenue multiple for established SaaS companies and high growth SaaS companies. High growth companies peaked in February last year at about 22x forward revenues and have fallen to 11x on March 1, 2015. Established companies dropped similarly from 6.6x to 4.5x.
Every SaaS company should be focused on mitigating churn because greater retention enables a business to grow far more rapidly, to reduce the cost of customer acquisition, and to slash the amount of capital required for the business to grow. But there's one additional reason to focus on churn: predictability. The more dollar churn a business creates, the less predictable its performance - and vice versa.
In a recent survey, 40% of VCs pointed to SaaS as the startup sector most likely to be impacted by a market correction. There's no question that the early stage SaaS founders are benefiting from substantial multiple expansion and pre-money valuation increases. But I was curious about how widespread aggressive investments are in software companies. As the data below shows, the seed and Series A markets have been stable, but Series B rounds have seen a dramatic acceleration recently.
When you walk into Looker's offices, the first thing you'll see are the surfboards standing in a corner, still sandy from a morning's outing. Looking around, you'll notice the sunny outdoor patio where a chef once made enough paella in one enormous *paellera* for Looker's 100 employees, and you might sit at the long tables where they shared the feast. As you entered the building, you would have passed a motorcycle glinting in the sun, a gift from the company to an early engineer for his outstanding contributions to the business. All around the office, you can feel the culture Frank, Lloyd and the rest of the Looker team have imbued into company from the very earliest days.
There's a magical property to the classic sales funnel SaaS startups use to evaluate the effectiveness of their go-to-market organizations: an increase in effectiveness at any stage of a sales funnel cascades through to the end funnel. But improvements to the early parts of the funnel are more important than those later in the funnel, because they meaningfully improve key SaaS metrics like cost-of-customer acquisition and pay-back period.
Over the past four years, the amount of seed investment has increased by more than 200%. And the typical seed investment size has risen by 25% in just the last 12 months. In 2014, for the first time in four years, median Series A round size have increased.
After writing about the Seed Market in 2015, I wondered whether I could find some data to support Sam Altman's observation that acquihires have fallen in frequency over the past year by 66-75%. The chart above shows an estimate of the acquihires in US technology companies over the past four years.
A few weeks ago, I joined Mike Volpe, CMO of Hubspot, on the Growth Show where we had a great time talking about a few SaaS topics. A few listeners to the podcast picked a line from that podcast that I think is a really important point for content marketing. I said, "Content is one of the few forms of marketing that has a compounding return."
The seed stage investment market feels like it's changing quickly. Last year and the year before, the institutional seed investor came to the fore. These firms raised between $5 and $75M to invest in seed stage companies. In addition, VCs have been participating in the seed stage market as well, making 2013 a banner year for seed investment. Startups raised 132% more in seed rounds than in 2012. But what of 2014? And what does it mean for 2015?
Once a startup has found an initial product market fit, the business must evolve the way it models its growth. Before product market fit, a startup's financial projections focus on costs. The company has no visibility into their revenue growth. So, the management team should minimize costs, maximize cash and lengthen runway to provide as much time as possible to find that product market fit. As we've seen, staff are both the greatest asset of a business and also the greatest cost, at least initially, and modeling those is straightforward. But when a repeatable sales process seems to have been discovered, it's time to develop the startup's revenue forecast.