In a post earlier this week, I argued 1% of Salesforce’s revenues creates a unicorn. More broadly, I said that the biggest SaaS companies are so large, that they must have underserved customer segments. And there is an opportunity for a startup to identify that underserved segment, build a product to serve it better, and build a unicorn. I received a lot of comments about this post, but not the kind that I expected.

Many people wrote me to say that 1% of revenues does not equal 1% of market capitalization. In other words, even if start of were able to win over 1% of Salesforce’s revenues, it would not equate to a $1B valuation. Also, one person accused of clickbaiting: writing an article with a misleading headline, which is something I try very hard not to do.

Given that feedback, I thought it important to explain in more detail how SaaS companies are valued.

In the public markets, SaaS companies are valued based on an enterprise-value-to-revenue multiple, or EV/Rev. To calculate the enterprise value, which is the market capitalization minus debt and cash on the balance sheet, you multiple the current revenue by this multiple.

Salesforce’s current EV/Rev multiple is 9.7x. Salesforce’s trailing revenue is $11.8B. $11.8B of revenue x 9.7x EV/Rev ~= $114B in enterprise value, which is Salesforce’s current enterprise value. That math works.

If you were to start a competitor to Salesforce - and the financial profile of the business were roughly the same - that startup would fetch a similar multiple in the public markets. 1% of Salesforce’s revenue is $118M. $118M at a 9.7x multiple = $1.144B in enterprise value. 1% of Salesforce’s revenue would create a unicorn in the public market. In the private market, where multiples are higher, the value of the business would be greater.

That’s the math behind Monday’s post.