GrubHub Raises $192M Pricing IPO Above Marketed Range
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Can someone with a classic financial finance background answer this: why do analysts take revenue * multipliers for valuations? Aren't most valuations based on EBITDA * multipliers? Is this just an odd side effect of the numerous tech companies without EBITDA?
For an older company that is not growing or is growing slowly, an EBIDTA multiple makes more sense.
Here's my simplified take on it, YMMV:
For companies with high variable costs, you value on EBITDA. For companies with low variable costs, you value on revenue.
Consider a widget maker, each widget he sells for $1.00 costs him $0.65 in materials to make, his margins are 35% per sale. Therefore, it's much better to value his company based on EBITDA, or how effective he is after all of those variable costs that can't be whisked away.
Now, consider a SaaS app maker. She has a variable cost of about $0.03 for every dollar she sells in services, or 97% margin per sale. You'd value based on her revenue, as profits are not constrained by variable costs, but by fixed costs which can be reduced if needed.
> You'd value based on her revenue, as profits are not constrained by variable costs, but by fixed costs which can be reduced if needed.
If we assume that acqui-hires are indeed a model in today's M&A, then doesn't this negate the idea that these fixed costs are fungible (i.e. people) and therefore cost reduction is not possible? Also, I keep hearing this notion that cost of sale goes down in SaaS. This might be true in early to mid stage SaaS, but at mass scale, I haven't seen this to be true.
I'm not sure about there being a hard and fast rule of cost-of-sale in SaaS - I would expect that's largely based on the target customer, enterprise targets are usually going to have a higher customer acquisition cost than consumer targets. Or, by cost of sale, do you mean variable cost? If variable costs approached those of manufacturing in software companies, you'd have to take a hard look at the management and consider replacing them quickly. =)
> If variable costs approached those of manufacturing in software companies, you'd have to take a hard look at the management and consider replacing them quickly. =)
Having looked at various large SaaS companies (SF, Workday, etc) the variable costs appear to be quite high.
Yeah, I've seen some of that too, but I still think that outside of certain specialized markets and products, that the variable costs shouldn't approach 60%+ on the LTV of a sale. I would also tend to calculate commissions and one-time marketing expenses not only against the first month or payment period, but on the total LTV of the sale.
Valuations multiples on revenue really only appear for extremely-high-growth companies (read: startups) which are spending an enormous amount on development and/or sales for future revenues. Those high costs render their EBITDA or income a poor indicator of their current success.
(Also, startups tend to have negative income so the earnings would be negative...)
Back in about 2006 when they were just starting out, I had a competing site and remember how sh*tty their site was (even had .jsp in the homepage file extension!); from that to becoming a $2 billion company (granted with Seamless merger)...all hats off to them...
We're a small startup out of Charlottesville, VA, but we'd love to help out your mother if we can! Hit me up at rory at getfoodio dot com if you're interested.
If you're a random sushi or Chinese place it's worth the 25% to be in the Seamless directory because otherwise no one will ever order from you. Katz's Deli could probably get away with ordering on their own site because their brand is good enough.