Meritech Capital’s recent newsletter does a bunch of regression analyses and case studies to examine the different drivers of MOIC (multiple of invested capital) for SaaS companies, it’s pretty interesting:
Some of the things it highlights are a little “duh”, but the primary theme is nevertheless a useful reminder:
“durable growth, i.e. the persistence of revenue growth over time, matters more than the absolute pace of revenue growth or changes in valuation due to market conditions”
Also, potentially useful if you’ve never seen it, Meritech has some visualization tools that let you look at different SaaS metrics - it’s very similar to Jamin Ball’s weekly newsletter for those who subscribe to it, but you get to play with the visualizations yourself:
Very interesting MikeLess.
Effectively it is saying that revenue growth CAGR doesn’t matter as much as the durability of being able to multiply revenues in terms of total $s. In other words durability runway and TAM may well have more of an impact on long term returns than LTM revenue growth and revenue CAGR, (which I guess is why I have remained in The Trade Desk and eCommerce for example and why SFDC and Amazon and Microsoft of non SaaS business models continue to deliver).
Of course that is assuming you’re in LTBH or buy from IPO to present day. Confounding factors here are the inflation of the IPO price and the current depressed valuation of SaaS as well as survivorship bias in the data which discards data of failed or acquired companies along the way but still this is interesting.
The caveat to this though from a Saul’s method approach is that his holding period is more like 2-3 years for just the hypergrowth period and the thesis here is that to continually search for and switching within the best possible choice from the hyper growth part of the S curve can still produce better returns than LTBH from IPO to present day/infinity.
What I found interesting was the 2nd chart in the article. Plotting the Internal Rate of Return (IRR) for the top 25 SaaS companies.
The winners by at least a 10% margin were… MDB, ZS, BILL, CRWD, NET & DDOG. Scoring an IRR of 109% in BILLs case.