Do start-ups have to project a growth of 150%+ to get a good valuation?

During one of our 409A valuation analysis and the subsequent sale of the company to a public company (known for bargaining fair valuation multiples), we discovered that the company had been strategically sold for a valuation multiple much higher than the MVIC to Sales or Price to Sales multiples available out there for comparable companies, even industry leaders. This high valuation multiple confirms our assertions:

1. The market for good assets is still good. The asset under question had revenues projected to grow at 35% CAGR over the next two years but become profitable only in 2011.
2. There is a dearth of good quality assets out there. Public companies are still bidding for the right assets.
3. It is important that companies work longer and harder to reach positive revenue stages and an EBITDA break even point that could be almost certainly achieved in 2 or 3 years after the sale.
4. We see a lot of start-ups projecting their 3 or 5-year compounded revenues to grow at very high rates, often running in excess of 150%. Not really necessary to do this. As we can see a 3 year 35% CAGR at a mature revenue stage gets you a good valuation. This company even during its early revenue stages projected only a 76% CAGR for 5 years. At Accuserve, we believe that credible revenue models show maturity in a company's management and leads to much better performance benchmarking, rather than reaching out for outlandish targets.

We hope start-up founders will take note of how business is actually done and how exits are achieved. We are always available to advise on such matters.

SaaS software's re-emergence

We believe that the resistance to adopting SaaS as a software solution is diminishing. In the FY 2007 Goldman Sachs technology Report, SaaS came in at #18 out of 30 investment priority areas by CIOs of large firms. In FY 2006's report, SaaS came in at #30 - dead last. In the SaaS category, the CRM/marketing & sales automation category commands the best valuation - both in IPOs and M&As. Broadly speaking, this category fetched almost twice as the average multiple for the entire SaaS category. Advancements in areas such as virtualization servers and cloud computing solutions are prompting start-up firms to design solutions for various verticals using the SaaS way. A note of caution is that many companies have still not figured out what the real costs of integration of SaaS with legacy systems are and therefore, in our opinion, valuation multiples will stay depressed for the overall SaaS category. Sensitive applications such as security software continue to be a no-no for deployment on SaaS platforms. The other risk factor is pricing. There is no set pattern of pricing in this industry and prices vary widely contributing to significant cash flow volatilities. On a review of their business plans, some small businesses are forecasting optimistic revenues per license/seat/user/subscriber and operating margins . We believe that conservative operating margins and average revenue per subscriber should be the norm in this industry . Visit www.accuserveus.com to learn more about us.