{"id":1856,"date":"2016-11-29T00:10:01","date_gmt":"2016-11-29T00:10:01","guid":{"rendered":"http:\/\/www.rsoftsolution.com\/blog\/how-to-estimate-a-companys-health-without-really-trying.html"},"modified":"2016-11-29T00:10:01","modified_gmt":"2016-11-29T00:10:01","slug":"how-to-estimate-a-companys-health-without-really-trying","status":"publish","type":"post","link":"https:\/\/www.rbsitsoftwaresolution.in\/blog\/how-to-estimate-a-companys-health-without-really-trying.html","title":{"rendered":"How to estimate a company\u2019s health without really trying"},"content":{"rendered":"


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\t<\/p>\n

Jeff Epstein is an operating partner at Bessemer Venture Partners.<\/p>\n

\tHow to join the network<\/a><\/p>\n

\t<\/p>\n

Josh Harder is a senior associate at Bessemer Venture Partners focusing on investments in software, mobile and telecommunications.<\/p>\n

\tHow to join the network<\/a><\/p>\n

Within the past few months, NetSuite<\/a>, Marketo<\/a>, LinkedIn<\/a>, Fleetmatics<\/a> and LogMeIn<\/a> have each been acquired or merged for a combined value of more than $50 billion. At this rate, public SaaS companies may become an endangered species. Clearly, PE investors and larger technology companies sense opportunity and value.<\/p>\n

What separates the chosen companies from the rest?<\/h2>\n

The Rule of 40<\/a> is a common VC<\/a> and management trick to distinguish the best-run SaaS companies at scale from the rest of the pack. The Rule of 40 is incredibly simple to calculate \u2014 just add a company\u2019s current growth rate and its profitability. This simple calculation lets you compare a company growing at 100 percent with -60 percent profit margins to a company growing at 40 percent at break-even or a company growing 10 percent but with 30 percent profits.<\/p>\n

We\u2019re often asked by our portfolio companies and prospective investments how to balance growth and profitability. Naturally, companies are focused on growth, but growth does come at a cost. Therefore, we\u2019ve taken a new approach to the long-standing Rule of 40 to optimize for \u201cefficient growth.\u201d<\/p>\n

Enter the Bessemer \u201cEfficiency Score,\u201d which measures a company\u2019s efficiency by taking the sum total of a company\u2019s percent growth + percent free cash flow (FCF) margin. This simple calculation quantifies the growth efficiency of a given cloud business. At different stages of a company\u2019s life cycle, their Efficiency Score changes. But for the average public company a few years after IPO, an Efficiency Score above 40 is considered great.<\/p>\n

For example: Public SaaS companies\u2019 2016 projections average 28 percent annual growth with 3 percent FCF margins, for an Efficiency Score of 31 percent. Slightly fewer than half of the current public SaaS companies have a combined growth and FCF margin above 40 percent.<\/p>\n

But does the Efficiency Score actually mean anything, or is it just an easy discussion point at board meetings?<\/p>\n

In reality, we found that a company\u2019s Efficiency Score has a greater than 70 percent correlation to a public SaaS company\u2019s revenue multiple, which is a company\u2019s valuation divided by their revenue, and a standard metric for how investors price stocks. The top quartile of public SaaS companies by revenue multiple have an average Efficiency Score of 44 percent; the bottom quartile have a score of just 9 percent.<\/p>\n

Public investors agonize over where to put their money, but with just two numbers and 15 seconds you can have a good sense of how a company will be valued.<\/p>\n

\"chart-1\"<\/p>\n

Chart 1: There is a strong correlation between revenue multiple and a company\u2019s Efficiency Score (Source: CapIQ and BVP)<\/p>\n

Are companies getting better?<\/p>\n

Over the past four years, SaaS companies have been surprisingly consistent in their average Efficiency Score \u2014 from 28 percent to 31 percent. However, the composition of the score has changed a lot as public SaaS companies have matured. Whereas in 2012 the average public SaaS company was growing at 55 percent a year and losing -28 percent in FCF, by 2016 growth was down to 28 percent and with average profitability at 3 percent. This shift is fairly predictable \u2014 as companies like Salesforce and Workday have gotten bigger their growth has declined and profitability has improved.<\/p>\n

\"chart-2\"<\/p>\n

Chart 2: Average growth and FCF margin of public SaaS companies 2012-2016 (Source: CapIQ and BVP)<\/p>\n

In fact, SaaS companies usually have the best Efficiency Score in the years preceding their IPO. Current cloud companies had an average Efficiency Score of 73 percent three years before their IPO, versus a mid-30s level post-IPO. The best cloud companies (those that go public) are incredibly efficient when they\u2019re young and growing fast. As they mature, FCF grows as growth falls, but companies tend to become less efficient overall as increases in profitability rarely make up for stratospheric growth.<\/p>\n

Efficiency Score of public SaaS companies @ IPO<\/h2>\n

\"chart-3\"<\/p>\n

Chart 3: Efficiency Score of Public SaaS Companies at IPO (Source: CapIQ and BVP)<\/p>\n

So what?<\/p>\n

It\u2019s not just public investors who are paying attention to the Efficiency Score. The following chart is a list of public SaaS companies, ranked by their 2016 Efficiency Score score. Four of these companies, Fleetmatics, LinkedIn, LogMeIn and Marketo, have been acquired (or, in the case of LogMeIn, merged). Three out of the four were in the top 11 companies ranked by their Efficiency Score when they were acquired. These companies were in entirely different industries \u2014 fleet management, social networking and remote connectivity, respectively \u2014 but their growth and relatively profitability made them top performers.<\/p>\n

What\u2019s more: All of these companies were trading relatively cheaply compared to their Efficiency Score. The top 10 Efficiency Score companies trade on a median of 8x, but Fleetmatics was trading at 4.8x, LinkedIn at 6.9x and LogMeIn at 6.9x. No wonder strategic acquirers saw a bargain!<\/p>\n

\"chart-4\"<\/p>\n

Chart 4: Public SaaS companies ranked by Efficiency Score (Source: CapIQ and BVP)<\/p>\n

So, which public SaaS company could be next?<\/p>\n

Our pick would be Qualys<\/a>, a network security company. Qualys is in the top 10 Efficiency Score companies with 23 percent FCF margins and 21 percent growth, but trading at just 5.5x revenues, a steep discount to where similar companies are trading.<\/p>\n

<\/p>\n

Featured Image: Daniele Carotenuto Photography<\/a>\/Getty Images<\/small><\/p>\n

Article source: http:\/\/feedproxy.google.com\/~r\/techcrunchIt\/~3\/Y_fhgUcslpk\/<\/p>","protected":false},"excerpt":{"rendered":"

Jeff Epstein is an operating partner at Bessemer Venture Partners. How to join the network Josh Harder is a senior associate at Bessemer Venture Partners focusing on investments in software, <\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[19],"tags":[25],"class_list":["post-1856","post","type-post","status-publish","format-standard","hentry","category-enterprise-software","tag-enterprise"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t