Centaurs over Unicorns: The SaaS Startups have New Milestone to Catch Up to

SaaS

SaaSCloud can serve powerful sales for SaaS companies that sell into enterprises with solid cloud spending!

Cloud marketplaces have emerged as one of the most natural places for SaaS buyers and sellers to transact, regardless of whether it is a bottoms-up purchase or a large enterprise deal. These platforms provide value to both buyers who want to consolidate spending with their cloud providers and gain economies of scale, and SaaS sellers, who want to streamline the procurement process and access larger budgets. Cloud marketplaces can serve as powerful sales and fulfillment channels for any SaaS companies that sell to enterprises with substantial cloud spending. There’s a broad range of SaaS players who flock to marketplaces, including sales, marketing, and communications SaaS companies, not just infrastructure SaaS providers.  

For every dollar a SaaS business spends on its sales team, the company will see a dollar of recurring revenue materialize in less than a year and grow nearly in perpetuity. The power of the cloud model is why these businesses are often valued at 10 to 20 times their annual revenue, even in today’s market. At these multiples, each dollar invested in growth can create tens of dollars of enterprise value every year. (In fact, the leading cloud companies turn US$1 of investment into US$18 of enterprise value in 12 months). 

 

Three key trends are reducing the friction in accessing cloud services:

Sensitive data on the cloud- Cloud early adopters continue moving increasingly sensitive data like security logs and financial records to the cloud, which would have been nearly unthinkable a decade ago.

Virtual private clouds- It is becoming easier to package SaaS products and deploy them inside a customer’s virtual private cloud (VPC). This is due in part to the standardization around Kubernetes as the operating system of the cloud. This makes it easier for SaaS companies to serve a wider range of customers that may prefer to keep certain sensitive data or applications in a VPC.

Middleware building bridges- Emerging middleware platforms are making it easier to bring the power of the cloud to the data, wherever it may be. This has played out in industries like financial services, where a wave of modern fintech infrastructure helped build bridges between the cloud and legacy banking systems. We are seeing similar bridges being built in other large industries like supply chain, logistics, and healthcare to bring the power of the cloud to these on-premise data sources.

Unicorns can be illusions, often appearing a lot bigger than they are in reality. At a 34x ARR multiple, a company only needs US$29 million in ARR to achieve unicorn status. For a US$29 million ARR company growing at 100%, a 34x ARR multiple also equates to a 45x current revenue multiple (US$22 million of GAAP revenue with midyear booking).

 

Where a US$1 billion valuation was once a distinction, it is now prosaic.

Venture investors correctly use ARR to evaluate private cloud companies’ performance to reflect their rapid growth rates. However, the ARR metric overstates revenues by annualizing annual contract values and crediting the business with annual customer retention.

While hitting US$29 million ARR is a fantastic accomplishment, across the BVP Nasdaq Emerging Cloud Index, the average LTM GAAP revenue at the time of IPO was a staggering US$170 million. In other words, many top cloud unicorns still have the formidable undertaking of growing their revenue another 7x to hit the average IPO scale.