Technology startups are now entering a new norm in terms of current valuations and eventual liquidity events. Global uncertainty has caused public markets to quiver in fear, and technology sectors are being skewered one after another. But where exactly are the corrections occurring and how does it measure up to historical trends? Are certain sectors faring better than others? Let's examine NTM revenue multiples over a 5 year period for all key Internet categories as well as high growth SaaS to see what we can learn.
NTM Revenue Multiples Over 5 Years
What's interesting is how all of these extremely different categories are converging to a forward revenue multiple around 2-3x. Let's examine each of the categories one by one:
Social - Consists of Facebook, LinkedIn and Twitter. This category has historically traded at a premium to other categories. This has been largely driven by Facebook's 10x+ revenue multiple, but the median has now plummeted to 3.3x forward revenue. Twitter has continued its steady decline, now worth less than 3x forward revenue. LinkedIn, once trading similarly to Facebook, dropped almost 50% last week due to Q4 earnings and is now worth just shy of $15B and just over 3x forward revenue.
Marketplaces - Consists of companies such as Just-Eat, LendingClub, Zillow, Yelp, GrubHub, Etsy, TrueCar, etc. From the chart above, it's clear that in the early days of high growth marketplaces it was not unusual for companies to trade north of 10x forward revenue. However, multiples have compressed rapidly as a result of slowing growth as companies have matured. The public markets are also just giving marketplaces less credit, similar to how many other categories have been fundamentally devalued. As a result, marketplaces are now the second worst valued category after ecommerce.
Travel - Consists of Priceline, TripAdvisor, Expedia and Sabre. Travel has been fairly healthy over the years and has been largely driven by the massive online travel opportunity and the healthy duopoly between Priceline and Expedia. The category is currently sitting at about 4x forward revenue.
Digital Media / Gaming - Consists of large diversified media properties such as Yahoo, Google, and IAC, as well as gaming and vertical media companies such as Activision, EA, Pandora and Zynga. This category has also been fairly stable. Large, diversified media companies have buoyed laggards in the space such as Zynga, Take-Two and Pandora. Overall, the sector has always traded between 2.0-4.0x forward revenue.
Ecommerce - Consists of companies such as Fitbit, Amazon, Coupons, Zalando, Ocado, ASOS, RetailMeNot, JD.com, Wayfair, etc. Ecommerce has always traded poorly. Aside from the occasional short-term anomalies such as Fitbit and GoPro, the public markets have been fairly consistent in valuing these companies at a modest 1.0x-2.0x forward revenue.
High Growth SaaS - The final category is high growth SaaS, consisting of companies such as Salesforce, Workday, ServiceNow, Splunk, Netsuite, Veeva, Demandware, Cornerstone, Zendesk, New Relic, etc. This category may have the most tumultuous history of them all. SaaS valuations gradually ticked up between 2011 and 2014, reaching almost 15.0x forward revenue by early 2014. At that point, there was a harsh correction to around 6.0-8.0x forward revenue. Multiples hovered at that level for almost two years before being sharply corrected again, this time to 4.2x forward revenue (a farcry from 15.0x just two years prior). This was in part triggered by Tableau's whiff on earnings which caused the stock to drop 50%, taking down the rest of the sector with it. This obviously has nasty implications for private markets and puts a lot of SaaS companies in a precarious position. VCs and startups were recently justifying 10-15x forward ARR multiples (not even revenue) for small SaaS startups based on healthy public comps, but now that is looking quite irrational. See Joe Floyd's terrific post on SaaS valuations for more. He talks about how in order to grow market value, revenue needs to expand faster than corresponding valuation multiples compress.
And this analysis only focuses on relative valuation multiples. Looking at absolute valuations is also sobering. For example, Twitter and LinkedIn are worth just $10B and $15B respectively, yet they are massive businesses compared to a private company like Pinterest ($11B valuation). LendingClub is worth $2.5B, yet the magnitude of their loan volume is astounding when compared to private lending startups, some of which are valued as much or more than LendingClub. GrubHub, Yelp and Etsy are barely even "unicorns" anymore, but they have achieved results in a different league than most on-demand and marketplace startups.
The often cited "10x" revenue multiple just simply isn't a rule anymore. Public market investors are defining a new "norm" and the private sector needs to take note.