This Week’s Valuation Benchmarks for Operators

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How Much Revenue Do You Need to IPO?

I took a trip in the way back machine to see how the trend has evolved over time.

The median LTM (last twelve months) of revenue at time of IPO clearly moved from the $150M range into the +$250M range in the 20-teens period.

And the median is about to jump even higher.

I kept the trend going below for the partial 2024 calendar year, including Reddit ($804M in LTM revenue), Klaviyo ($585M), Rubrik ($628M), and Instacart ($2,900M). As the first ones out the gate, we anticipated they’d be bigger, and better equipped to navigate potentially stormy seas with more float and a mature, predictable business model.

But that’s a BIG jump. It’s a step function change of more than 2x the median from years prior.

OneStream’s upcoming IPO will take the median lower, and start to test stability at the lower end of the range. They put up $407M in LTM Revenue, and some are still looking at that as a bit risky, assuming they trade at a sub $5 billion market cap.

And that’s the rub – I used to think you could just build a good company that grows nicely, with solid unit economics, and you could go public at $100M in revenue.

You can. But you’re fighting an up hill battle to thrive in the public markets, which partially trade on attention.

And to get coverage from sell side analysts and also be a needle mover in the portfolio of investors (without needing to own massive positions), you need a market cap above $5B (some would even say above $10B). We discussed this at greater length a few weeks ago here. I’d encourage you to read why size matters.

And to tie the two thoughts together, if you’re lucky to garner a 10x valuation, it means you need $500M or more in NTM revenue.

If anyone comes back down into the $250M LTM revenue range, I’d expect they’ll have superior growth (+50%), positive free cash flow, and high confidence in the predictability of their model. Otherwise it’s like trying to sail the Atlantic in a dinghy (insert Tommy Boy reference).

TL;DR: Multiples are DOWN week-over-week.

Top 10 Medians:

EV / NTM Revenue = 13.0x (-0.4x w/w)
CAC Payback = 15 months
Rule of 40 = 51%
Revenue per Employee = $515K

Figures for each index are measured at the Median

Median and Top 10 Median are measured across the entire data set, where n = 109
Population Sizes:
- Security: 17
- Database and Infra: 14
- Backoffice: 15
- Marcom: 16
- Marketplace: 15
- Fintech: 16
- Vertical SaaS: 16
If you’d like the company level metrics used in these reports, upgrade to paid and you can download the excel sheet at the bottom of this post

Revenue Multiples

Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.

NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.

However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.

Reasons may include:

Recurring mix of revenue
Stickiness of revenue
Average contract size
Cost of revenue delivery
Criticality of solution
Total Addressable Market potential

From a macro perspective, multiples trend higher in low interest environments, and vice versa.

Multiples shown are calculated by taking the Enterprise Value / NTM revenue.

Enterprise Value is calculated as: Market Capitalization + Total Debt – Cash

Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week – to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.

Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.

Efficiency Benchmarks

Companies that can do more with less tend to earn higher valuations.

Three of the most common and consistently publicly available metrics to measure efficiency include:

CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?

CAC Payback Period is measured as Sales and Marketing costs divided by Revenue Additions, and adjusted by Gross Margin.

Here’s how I do it:

Sales and Marketing costs are measured on a TTM basis, but lagged by one quarter (so you skip a quarter, then sum the trailing four quarters of costs). This timeframe smoothes for seasonality and recognizes the lead time required to generate pipeline.

Revenue is measured as the year-on-year change in the most recent quarter’s sales (so for Q2 of 2024 you’d subtract out Q2 of 2023’s revenue to get the increase), and then multiplied by four to arrive at an annualized revenue increase (e.g., ARR Additions).

Gross margin is taken as a % from the most recent quarter (e.g., 82%) to represent the current cost to serve a customer

Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise – there’s nowhere to hide.

Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)

Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and EBITDA Margin. Netting the two should get you above 40 to pass the test.

Rule of 40 is calculated as: TTM Revenue Growth % + TTM Adjusted EBITDA Margin %

A few other notes on efficiency metrics:

Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for some types of companies, like marketplaces, to report it at all.
Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m doing my best to approximate using changes in reported GAAP revenue. I admit this is a “stricter” view, as it is measuring change in net revenue.

Operating Expenditures

Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.

The most common buckets companies put their operating costs into are:

Cost of Goods Sold: Customer Support employees, infrastructure to host your business online, API tolls, and banking fees if you are a FinTech.
Sales & Marketing: Sales and Marketing employees, advertising spend, demand gen spend, events, conferences, tools
Research & Development: Product and Engineering employees, development expenses, tools
General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead”

All of these are taken on a Gaap basis and therefore INCLUDE stock based comp, a non cash expense.