Public Market Multiples and the Impact on Private Market Valuations

David Cummings

Jul 2

Jason Lemkin has an excellent piece up titled Zendesk and Anaplan: A Tale of Two Very Similar, And Very Different, $10B SaaS Acquisitions.

Zendesk and Anaplan: A Tale of Two Very Similar, And Very Different, $10B SaaS Acquisitions

The big idea is that Anaplan and Zendesk selling for $10B while having similar growth rates and public market premiums is a function of market timing. Anaplan at 14x run-rate and Zendesk at 6x run-rate shows how valuations can change quickly. Public valuations as a multiple of run-rate were more than twice as high a mere six months ago. Now, we're in a new era of valuations.

Public market valuations often govern private market valuations. If two SaaS companies are growing at the same rate with similar margins, addressable market, cost of customer acquisition, and net dollar retention, with one being public and trading at 6x run-rate, the private one will most likely be valued at 6x run-rate, or less. Historically, private companies with similar metrics as public ones would have a lower valuation due to lack of marketable securities, smaller revenue base, more limited financial audits, etc. Surprisingly, during the Great Exuberance of the last few years, private company valuations became more valuable than comparable public companies. Of course, it didn't make sense unless there was something fundamentally different e.g. size of addressable market or quality of viral distribution — almost all private companies didn't qualify.

Now, with markets back to normal, startups that raised at valuations above public market multiples will have an even more difficult time raising money at a price greater than their last round unless they've grown substantially. With an impending recession, growth is going to be even more challenging.

Public market multiples directly impact private company valuations. Other than a brief period of time recently, it's been this way forever. As entrepreneurs, we should understand this relationship and take it into consideration as part of our fundraising plans.

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