Mitesco Inc. (MITI)

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Software & Private/Public Valuation for SaaS Companies

Private tech and SaaS (software as a service) companies command far higher revenue multiples than public companies. It’s an odd situation given that the latter have liquidity (ability to free up your investment by selling stock) while the former are decidedly not (stuck until company is bought out, goes public or simply participate in a revenue share).

According to Bessemer’s State of the Cloud 2018 report (here), startups are not only able to command revenue multiples (a valuation derivative) far higher than their public counterparts, but the trend is actually re-accelerating.

Indeed, as the following chart from the report shows, 2017 brought a sizable rebound in the amount of money that private investors are willing to pay for present-day startup revenue.

Now annual recurring revenue (ARR) is a good thing for a company to have. Recurring revenue is more predictable than non-recurring revenue, so investors are sometimes willing to pay more for it than other types of top line. But if investors in public companies are willing to pay around six times ARR, why in the flying heck would private investors be willing to pay nearly three times that much for privatecompany ARR? (Recall: private companies are illiquid investments.)

The simple answer is that they don’t, or at least not really. Instead, private investors are buying futureARR, looking at a combination of base (current) ARR and growth. So private companies that have higher growth rates against their current ARR can likely command a higher revenue multiple than their slower-growing compatriots. This is where aggressive management from True Nature can purchase private SaaS related companies to immediately increase both current and future revenues.

There’s nuance here (CAC payback periods, gross margin expansion or compression, LTV, and other various acronyms that are really mere revenue qualitymetrics), but in short, growth is what makes that 15.9 number is perhaps less bonkers than it looks at first read. We have seen multiples as high as 20-30x in companies with huge future potential.

Offering software as a product or service, coined software as a service (SaaS), is great news for shareholders as wall street valuations on these categorized companies have reflected a healthy trading multiple average of 7.2x ARR for the more popular 38 public companies listed below. (see chart) The top group trade at an ARR of 9-12x, but don’t forget this was a year ago.

So, what is True Nature’s ARR and where does it stand against other public SaaS companies? The answer creates a valid argument that True Nature is “undervalued” versus its peers and if the company acquires additional companies that affect the valuation formula, TNTY could be extremely undervalued and potentially a wise investment.

True Nature’s ARR Grid

https://emerginggrowth.com/wp-content/uploads/2018/08/TNTY-11.png