Japan / US Public SaaS Company Valuation Trend

Written by MinJoon Choi, Associate at DNX Ventures / Reviewed by Akira Kurabayashi, Managing Partner and Head of Japan at DNX Ventures

Recently, B2B SaaS startups have been gaining momentum in Japan, and similarly, the public market has been paying much more attention to SaaS companies. In particular, in recent years, the number of SaaS companies listed with a high market cap has increased significantly, with examples such as Sansan, freee, Visional, and Yappli. Institutional investors are paying increasing attention to them. This article will cover the valuation trends of listed SaaS companies in Japan and the US.

Let’s start with the current state of Japanese Public SaaS companies.

Chart 1. Japanese Public SaaS Companies

Source: Thomson Eikon Refinitiv

Note: Stock price as of 11/26/2021

The table above is a simple comps table of the major SaaS companies in Japan. As you can see from this table, we are very pleased to see several SaaS companies with a market capitalization of over 100 billion yen. In previous years in Japan, SaaS companies were valued based on PER (net income), however, in recent years, there has been a clear shift of attention to the Revenue multiple.

• EV / Revenue = Enterprise Value / Revenue
• Enterprise Value = Net Debt + Market Capitalization

Among them, institutional investors are particularly interested in selecting and evaluating stocks based on future earnings forecasts (mainly Revenue and ARR in the case of SaaS companies). Some institutional investors may benchmark earnings two or more fiscal years in advance, but the primary indicator is the EV/Revenue multiple for NTM (Next Twelve Months). In the above Comps Table, we included multiples for FY+1 (based on the earnings forecast one fiscal year ahead of the current fiscal year) for convenience, however, it is assumed that there is no significant deviation from the NTM multiples.

The current EV/Revenue multiple of Public SaaS companies in Japan is 16.4x on average and 17.6x on the median, which is comparable to the average of SaaS companies in the US (shared later). This indicates that EV/Revenue has become a common standard in Japan.

Chart 2: Japanese Public SaaS Company NTM EV/Revenue Multiple Trend

Source: Thomson Eikon Refinitiv

The above chart shows the NTM EV/Revenue multiples of major SaaS companies in Japan (dataset is between January 2020 to November 2021). Clearly, there is a rapid jump up in the Japanese SaaS company multiples. In fact, the multiples of US SaaS companies also increased rapidly during the same period. In addition, Chart 3 displays the Emerging Cloud Index published by Bessemer Venture Partners, one of the top SaaS VC firms in the US. It shows that the index has risen sharply since hitting bottom around March 2020 and has outperformed other major indices by a wide margin, outperforming other major indices. Moreover, as one can see on Chart 4, software companies are gaining momentum and presence every year.

Chart 3: The BVP Nasdaq Emerging Cloud Index Trend

Source: Bessemer Venture Partners

Chart 4: US Software Total Enterprise Value Trend

Source: FactSet, Credit Suisse

With COVID-19 destabilizing the economic outlook, many public companies experienced deteriorating performance, which triggered investors to change their focus. For instance, with SaaS companies being less vulnerable compared to other industries during the COVID-19 economic shift, there was a flow of funds into the SaaS stocks. In addition, COVID-19 has impacted the way many companies and employees work and has drastically promoted remote work. In fact, the performance of many SaaS companies actually increased significantly after the COVID-19 (e.g., Zoom, Slack, Datadog, etc.), partly because many SaaS products had features that could support such a corporate trend.

What factors affect EV/Revenue Multiple?

Now, let’s look at what factors form a high EV/Revenue Multiple. The first and most crucial factor is Growth Rate.

Chart 5: Correlation between Japanese SaaS Company EV/Revenue Multiple and Revenue Growth Rate

Source: Thomson Eikon Refinitiv

Note: The size of the circle indicates the market capitalization of each company; X-axis: current year Revenue growth rate; Y-axis: FY+1 EV/Revenue Multiple

Chart 5 shows the correlation between EV/Revenue Multiple and the Revenue Growth Rate of Japanese Public SaaS companies. In this analysis, we picked up 16 publicly listed SaaS companies in Japan, and among them, we can see that R2 is 0.8131, which is quite a high correlation. The EV/Revenue multiples of the three companies that have achieved revenue growth rates of +45% or higher in the current fiscal year (freee (+48.8% sales growth), Money Forward (+58.1% sales growth), and Spider Plus (+53.4% sales growth)) are highly rated at 23x or higher.

On the other hand, the three companies with revenue growth rates below 20% for the current fiscal year (Visional (+10.9%), Cybozu (+16.8%), and UZABASE (+10.3%)) have multiples below 10x. However, since these three companies have multiple businesses, the ARR multiples of their main businesses may be evaluated a little differently. Infomart (+2.8%) and HENNGE (+16.7%) also posted higher multiples (Infomart 28.7x, HENNGE 13.4x), although their revenue growth rates were relatively low this year. While Infomart’s sales forecast for the next fiscal year (ending December 2009) is not high at +8.7% YoY, Annual Revenue is already close to 10 billion yen, and the company has already achieved profitability on a net income basis. Therefore, we believe that the company’s high valuation is due not only to its simple sales growth rate but also to the fact that it can generate profits and is developing a platform business that is generally valued globally. Moreover, HENNGE is unique amongst the listed SaaS companies in Japan for being a security SaaS company. Consequently, HENNGE has a higher multiple than the three companies mentioned above. (There will be a section later in the article on the multiples of SaaS companies in the US; however, Security SaaS has a reasonably high multiple in the US as well).

Next, we will focus on the correlation not only with Growth Rate but also with profit margin. As many of you may know, the “Rule of 40” is an efficiency score index published by Bessemer Venture Partners a few years ago, and it is calculated by “CARR Growth (= Sales Growth Rate) + FCF Margin.” An efficiency score exceeding 40% indicates that the company is in good shape. This article replaced FCF Margin with EBITDA Margin to see how it correlates with EV/Revenue multiples.

Chart 5: Correlation between Japanese SaaS Company EV/Revenue Multiple and Rule of 40

Source: Thomson Eikon Refinitiv

Note: The size of the circle indicates the market capitalization of each company; X-axis: Rule of 40; Y-axis: FY+1 EV/Revenue Multiple

Chart 6 shows the correlation between the EV/Revenue Multiple and the Rule of 40 for the major SaaS companies in Japan. An R2 of 0.6706 is a significant correlation; however, it is much lower than the revenue growth rate. Although the number of SaaS publicly listed companies in Japan is still small, only three companies have achieved the Rule of 40 (Rakus (Efficiency Score 57.7%), Spider Plus (59.2%), and Plus Alpha Consulting (63.9%)). These three companies are also profitable on an operating income basis but have also achieved a sales growth rate of over 29% year over year. Even for companies whose Efficiency Score is slightly below 40, the sales growth rate is the main component of the Efficiency Score. Therefore, in the correlation between the Rule of 40 and EV/Revenue Multiple, we can see that the sales growth rate is heavily weighted.

We will also examine the concept of “3GP” in a later section, and the results there also reaffirm the importance of Growth Rate.

Reasonings behind High Multiple

In this section, we will briefly discuss why the top SaaS companies in Japan, by market capitalization, can form high multiples. Please note that this is just our perspective.

Money Forward (FY+1 EV/Revenue Multiple: 26.7x)

Money Forward is one of the Japanese SaaS leaders, and its stock price has been rising steadily since its IPO. Its diversified business structure characterizes money Forward compared to its competitor freee. Its business portfolio includes a wide range of services other than cloud accounting, such as IT management cloud, settlement services, early capitalization services, X-domain services (Fintech platform for financial institutions), and HOME domain (household account book and asset management for individuals). As a result, the scale of potential customers is very large, which is considered to be a differentiating factor from other cloud accounting services. Money Forward has also been involved in the M&A of several Japanese startups and is expected to continue to use M&A as a part of its growth strategy.

freee (FY+1 EV/Revenue Multiple: 24.0x)

freee is a cloud accounting SaaS company whose stock price has also risen significantly since its IPO in the second half of 2019. freee has prioritized sales growth and continued to invest aggressively. With that, freee has become a leader in cloud accounting services for SMBs and is the fastest SaaS company in Japan to reach ARR10 billion (according to the company). As with Money Forward, the Japanese market share of cloud accounting is still low compared to the global market, meaning freee has tremendous room for future growth. In addition, freee has also announced that the company will enter the payment card space in 2021. Against this backdrop, the market expects a high sales growth rate for freee even in the medium to long term, often leading to high multiples.

Rakus (FY+1 EV/Revenue Multiple: 27.9x)

Rakus’ main products are not cloud accounting services but expense reimbursement and invoice/receipt software. Rakus, similarly to freee, has a leading position in the SMB expense reimbursement SaaS space, which we believe contributes to its high multiples. Rakus has also mentioned that the company aims to grow its sales at an annualized pace of 25–30% for the next five years, even though it has already achieved profitability on a net income basis. Although profitability may worsen slightly due to the expected aggressive investment in the future, the market also appreciates Rakus’ aggressive investment stance, which may have led to their #1 market capitalization of SaaS companies in Japan.

Next, let’s take a look at the valuation levels of US Public SaaS companies.

Chart 7: US Public SaaS Comps Table

Source: Thomson Eikon Refinitiv

Chart 7 is the US Public SaaS Comps table. Please note that we have hand-picked companies in each segment because there are far more SaaS companies in the US than in Japan.

Chart 7 is the US Public SaaS Comps table. Please note that we have hand-picked companies in each segment because there are far more SaaS companies in the US than in Japan.

The EV/Revenue multiple levels of US SaaS companies in FY+1 are 29.5x on average and 22.3x on the median, higher than the multiple levels of Japanese listed SaaS companies.

Chart 8: US Public SaaS Comps Table by Segment

Source: Thomson Eikon Refinitiv

Chart 8 above shows the multiple levels by segment. As you can see, DevOps & IT Management (51.7x), Security (30.8x), and Communications & Collaboration (27.2x) are the most highly valued of the SaaS companies. Some of the companies in these categories, such as Snowflake, are growing rapidly, but we think there is a valuation premium based on the industry category. One of the reasons for the high valuations is that these categories generally have large TAMs and high product scarcity. Depending on future market trends, we may refer to such high multiples if major players in similar categories emerge in Japan.

Chart 9: US Public SaaS NTM EV/Revenue Change

Source: Thomson Eikon Refinitiv

Chart 9 shows the change in NTM EV/Revenue multiples for Public US SaaS companies since mid-March 2020. We can see that the multiples have expanded significantly across the board from the above. In particular, if you look at the multiples of the companies that went public during COVID-19 (circled in red), they are at a much higher level than any other SaaS company in the US. This could have been because they were listed when money was flowing into SaaS companies due to COVID-19. In particular, Snowflake’s NTM EV/Revenue multiple was over 100x at one point, at an extraordinary level. On the other hand, listed stocks such as BigCommerce are still below the average at 15.0x. Therefore, we think the biggest factor is the premium factor of Snowflake’s performance and business.

Additionally, Zoom Video Communications was probably the most attention-grabbing company at the beginning of COVID-19. It may come as a surprise, but Zoom’s multiples have declined significantly (from 41.1x to 16.6x) since March last year. In the end, however, the market expectations were too high, and as a result, multiples gradually declined. Nevertheless, the market capitalization has grown significantly compared to the pre-COVID-19 period.

Chart 10: Correlation between US Public SaaS Company EV/Revenue Multiple and Revenue Growth Rate

Source: Thomson Eikon Refinitiv

Note: The size of the circle indicates the market capitalization of each company; X-axis: current year Revenue growth rate; Y-axis: FY+1 EV/Revenue Multiple

Chart 10 displays the correlation between EV/Revenue Multiple and the annual revenue growth rate for public US SaaS companies in a single year. The correlation between EV/Revenue Multiple and the growth rate in a single year is R2=0.4, which is much lower than that of Japanese SaaS companies because we selected 29 US SaaS companies (16 in the Japanese SaaS companies version), which differ significantly in scale and business content.

Chart 11: Correlation between US Public SaaS Company EV/Revenue Multiple and Rule of 40

Source: Thomson Eikon Refinitiv

Note: The size of the circle indicates the market capitalization of each company; X-axis: Rule of 40; Y-axis: FY+1 EV/Revenue Multiple

Chart 11 is the correlation graph between EV/Revenue Multiple and Rule of 40 of Public US SaaS companies, R2=0.1438, which is also considerably lower than that of domestic SaaS companies. The main reason for this could be that SaaS companies listed in the US are at different stages in their maturity, and investors change their valuation methodologies depending on the company.

Chart 12: Correlation between US Public SaaS Company EV/Revenue Multiple and Rule of 40

Source: FactSet, Credit Suisse

On the other hand, Chart 12 above, which includes a broader range of companies, shows that although Growth Rate is still the most important indicator, the multiples of companies that achieve Rule of 40 are generally high. Therefore, we can conclude that the Rule of 40 (i.e., the balance with margins) is not entirely non-functional.

Chart 13: US Public SaaS Company EV/Revenue Multiple and Revenue Growth (by Segment)

Source: FactSet, Credit Suisse

Chart 13 is a chart that categorizes Public US SaaS companies according to their growth rate: Mature / Maturing / High Growth / Hyper-Growth. The companies in each stage are roughly evaluated as follows.

• Hyper-Growth: Growth rate is more important than profitability, so EV/Revenue Multiple is also high with a certain amount of leverage. Investors are also monitoring the KPIs that break down top-line growth with their concern on the sustainable growth rate.
• High Growth: EV/Revenue Multiple is becoming somewhat normalized; Growth Rate is decelerating slightly, while FCF margin is improving in many cases. In this stage, EV/Revenue Multiple / FCF Multiple is used in combination depending on the company.
• Maturing: It is getting tougher for companies in this stage to double their sales within 3.6 years. The evaluation is not on the aggressive investment at this phase; however, it is on how well the company generates FCF.
• Mature: Top-line sustainability and earnings margin upside are key considerations. Other factors affecting valuations include activist activity, corporate restructuring, balance sheet optimization, and the level of interest from buyout funds such as private equity.

Chart 14: US Public SaaS Valuation Trend (by Revenue growth rate)

Source: FactSet, Credit Suisse

The above chart segments SaaS companies by revenue growth rate and shows each segment’s average NTM EV/Revenue Multiple. The difference is not large in valuation amongst the segments until 2019, when we started to see the valuations increase for companies with +40% or higher revenue growth rates. Perhaps, it is due to an increase in the number of companies listed on the stock exchange while maintaining high growth. However, we think it is also a result of the importance placed on the growth rate in the current market. So will the growth rate-oriented market environment that has accelerated over the past two years continue?

Chart 15: Correlation between Revenue Growth and EV/Revenue Multiple by U.S. Sector (2016–2021)

Source: FactSet, Visual Alpha, Credit Suisse

Chart 15 above shows the change in the correlation between the revenue growth rate and NTM EV/Revenue Multiple for each sector since 2016. We can see that only the Software sector shows a beautiful upward trend. This can be attributed to three main reasons: 1) the high probability of maintaining a high growth rate over the medium to long term (and easy to predict); 2) the lack of other attractive investment assets; 3) the market environment of too much money. All have contributed to the rise in the multiple of the Software sector. The fact that the EV/Revenue Multiple for the other sectors is less than 4x shows how much the Software sector is receiving attention. Given this trend, we do not expect valuations in the Software sector to fall anytime soon, but we do expect valuations to continue to differ between companies depending on the balance between sales growth and unit economics.

Examining 3GP

Finally, we will introduce “3GP”, which may not be familiar in Japan. This is a concept proposed by Norwest Venture Partners in the US as an approximate means of Rule of 40 in 2019.

Chart 16: 3GP (Norwest Venture Partners)

Source: DNX Ventures

The difference between 3GP and Rule of 40 is purely as below:

• Rule of 40 is “CARR Growth (= Sales Growth Rate) + FCF Margin”.
• 3GP is “3 x CARR Growth (= Sales Growth Rate) + FCF Margin”.

3GP is an index that gives more weight to the so-called revenue growth rate and considers a certain level of profitability. Norwest Venture Partners proposed this concept because the Rule of 40 was not functioning well in recent years, and the market has been changing to focus on growth rate. On the other hand, it is unhealthy to overestimate profitability, so they added this change to find another indicator.

We applied the above 3GP to SaaS companies in Japan and the US this time. If you have been reading this article up to this point, you may have already guessed the results.

First, Japanese Public SaaS Company

Chart 17: Correlation between Japanese Public SaaS EV/Revenue Multiple and 3GP

Source: Thomson Eikon Refinitiv

Note: The size of the circle indicates the market capitalization of each company; X-axis: 3GP; Y-axis: FY+1 EV/Revenue Multiple

We can see a reasonably high correlation between EV / Revenue Multiple and 3GP. We would like to emphasize here that the correlation with EV/Revenue Multiple is higher than the single-year revenue growth rate shown in Figure 5. In other words, the market may be placing more importance on maintaining the growth rate high than the growth rate for a single year.

Chart 18: Correlation between US Public SaaS EV/Revenue Multiple and 3GP

Source: Thomson Eikon Refinitiv

Note: The size of the circle indicates the market capitalization of each company; X-axis: 3GP; Y-axis: FY+1 EV/Revenue Multiple

On the other hand, the above results for US SaaS companies. We expected similar results to the Japanese SaaS companies; however, the correlation with EV/Revenue Multiple is lower than the single-year sales growth rate shown in Figure 10. Of course, the results will vary depending on the timing of the implementation. However, we think that it is challenging to apply to the entire SaaS industry in the US, where there are so many layers of company stages. If we do the same exercise for the Hyper-Growth / Growth SaaS companies that are mentioned in Exhibit 13, we would expect to see a much higher correlation.

Lastly…

In this article, we’ve dove into the evaluations of Public SaaS companies in Japan and the US. The market has changed dramatically in the past two years as we have followed the Public SaaS market trends for longer. We think that Public SaaS companies receiving attention is generally positive for SaaS startups in Japan. We hope this article will be helpful to your future growth strategy and IPO benchmarks.

Information provided by DNX Ventures is not a solicitation to take any investment action, nor is it in any way a recommendation to buy or sell any specific securities or financial instruments.