      Report · 2019-01-19
      · 2693d
    

An Update on the SaaS Rule of 40: Enterprise Value Correlation and IPO Readiness

Dave Kellogg analyzes Piper Jaffray's 2018 Software Market Review data showing the Rule of 40's relationship to enterprise value multiples in public SaaS companies. The analysis reveals that Rule of 40 compliance explains 42% of valuation variability, with each 10-point improvement in R40 score correlating to a 1.2x revenue multiple increase. Kellogg cautions that many startups target Rule of 40 compliance too early, potentially sacrificing growth and IPO valuations.

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Metrics in this report

Avalara IPO Rule of 40 Score

-2%

point-in-time

At IPO (26% growth - 28% FCF margin)

Elastic IPO Rule of 40 Score

84%

point-in-time

At IPO (76% growth + 8% FCF margin)

Enterprise Value to Revenue Multiple

6.6x

median

Public SaaS companies, 2018

Public Company Market Cap Concentration

80%

greater than

Captured by Rule of 40 compliant companies

Rule of 40 Compliance Rate

<50%

less than

Public SaaS companies in dataset

Rule of 40 Score

31.7%

median

Public SaaS companies, 2018