Here is why I like the Oomph Factor. First of all, a big thanks to Ron for inventing it and bringing it to the board!!! And also a thanks to Nilvest who has been working on a very similar method.
In the past, when we discussed valuing companies for investment by EV/S, I pooh-poohed using EV/S, saying that “Of course subscription companies, with nearly all recurring revenue, extremely rapid growth, high dollar-based net retention rates, and high gross margins, would have higher EV/S values than had previously been considered reasonable back in the days when people were looking at companies growing at 10% or 20% per year, most with no recurring revenue, and no net retention rates, and thus no ability to see future revenue”. (or something like that).
Then Ron came along with the Oomph factor, which doesn’t just look at bare EV/S ratios and compare them, but takes Growth Rate and Gross Margin into account… well duh! Why weren’t we doing that before???
Well, we were, but in a very impressionistic way in our heads (see the way I was thinking about it above). What the Oomph factor does is it gives you a multiplier for the bare EV/S value to make it fit better with what’s going on with the company.
I did my own EV/S/O scores on all my companies and a few more, and I found them quite useful. One suggestion though that I will make is that, in addition to growth rate and gross margin, the Oomph factor should take into account whether the revenue is almost all recurring subscription revenue (which gives a lot of revenue security), or whether it is not recurring.
We’ve been applying Oomph pretty much to all SaaS type companies so far, all of which have had a lot of recurring revenue and high dollar-based retention rates, so it hasn’t mattered. But if we start to compare against other companies out in the general public of investing, it will matter.
I feel that the Oomph factor should get a 10% boost if all of a company’s revenue is recurring subscription revenue. Having all of this year’s revenue assured for next year (at least) is certainly worth a 10% boost. For those not mathematically inclined, that means multiplying the Oomph factor by 1.10 before dividing it into the EV/S. Okay, but most companies don’t have 100% recurring revenue. Usually it’s 80% to 90%, with some service revenue tacked in there. Okay, I’ll boost by 9% for 90% recurring revenue (multiply by 1.09), and 8% for 80% recurring revenue, etc. That’s just how I plan to do it.
But remember that the Oomph factor is simply a non-intelligent tool, an attempt to quantify our qualitative impressions, and it’s neither rigid, nor some piece of magic. It doesn’t even take into account dollar-based net retention rate. It’s not perfect. And it will require some subjective decisions, and each of you can use it, or not, or modify it as you like. And some companies with high final values will do well, and some with low final values will do poorly. You still have to use your brain and your intuition.