Firewalls & Fire Sales
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The Sectors We Track
After talking to a few of our loyal readers (and the members of my team featured above), I’ve honed in on the following mutually exclusive sectors to continually benchmark:
Security
Database & Infrastructure
DevOps and IT Management
Backoffice
MarCom
Fintech
Marketplace
Vertical SaaS
Companies will only appear in one of the above. You can find the list of companies within each sector here.
Me and my friends at Virtua can provide second and third degree filters to the sectors above, like Usage Based, Customer Size, Go to Market Motion, Monetization, etc. available upon request.
On to the meat and potatoes of today’s post.
Firewalls & Fire Sales
So let’s talk about the reckoning that happened in Security this week:
You might remember - the company previously raised the largest funding round in cyber history back in November of 2021: $1.3 billion on an $8.3 billion post money valuation. I remember doing the back of the envelope math when the news broke to come out to approximately [a bajillion] X forward ARR. And if you add up all the rounds, they’ve raised a total of $1.8 billion to date.
It appears they burned, give or take, a billion bucks to produce roughly $100 million in ARR (a burn multiple of ~10x).
And Wiz will add it for less than 2x NTM revenue.
Now, the larger question is if this serves as an omen for further consolidation in the Security sector (both public and private), which has historically commanded top tech valuation multiples.
The median EV / NTM revenue multiple for the Security cohort we track is currently 9.7x. But when you dig into the actual companies, it quickly bifurcates into a lead pack, a chase pack, and a “we might get taken private or acquired if something major doesn’t change” pack.
+15x Range: Cloudflare and Crowdstrike
~10x Range: Palo Alto, Zscaler, CyberArk, and Qualys
~5x Range: SentinelOne, Tenable, Okta, and Fastly (3x!?!)
While Lacework is private, they clearly fell into (and then well below) that third bucket. In competitive running, they call that getting spit out the back.
One silver lining - apparently they still have $800 million in cash on the balance sheet, which will return to the cap table (investors). But still - the math doesn’t math - they’ll claw and scrape to get somewhat close to repaying the pref stack. And if you’re employee, tough cookies.
As an operator, it’s pertinent to ask the question - where in the pack (whatever that pack may be, not just Security) does my company lie? Because investors are not looking to be fifth fiddle. It’s pretty much top two in a category, or bust.
Why? The bulk of the “prize” is split between the top two players. There’s an element of preferential attachment in public markets - success snowballs, and begets more success. The rest pick up the crumbs, and become ripe for consolidation.
Know where you are in the pack. And don’t get caught in no man’s land.
Figures for each index are measured at the Median
Average, Median, and Top 10 Median are measured across the entire data set, where n = 115
All margins are non-gaap
You can find the list of companies within each sector here.
All definitions and formulas can be found here.
If you’d like the specific company level performance benchmarks used in these reports visit Virtua Research.
Revenue Multiples
Revenue multiples are a shortcut to compare valuations across the technology landscape, where companies may not yet be profitable. The most standard timeframe for revenue multiple comparison is on a “Next Twelve Months” (NTM Revenue) basis.
NTM is a generous cut, as it gives a company “credit” for a full “rolling” future year. It also puts all companies on equal footing, regardless of their fiscal year end and quarterly seasonality.
However, not all technology sectors or monetization strategies receive the same “credit” on their forward revenue, which operators should be aware of when they create comp sets for their own companies. That is why I break them out as separate “indexes”.
Reasons may include:
Recurring mix of revenue
Stickiness of revenue
Average contract size
Cost of revenue delivery
Criticality of solution
Total Addressable Market potential
From a macro perspective, multiples trend higher in low interest environments, and vice versa.
Multiples shown are calculated by taking the Enterprise Value / NTM revenue.
Enterprise Value is calculated as: Market Capitalization + Total Debt - Cash
Market Cap fluctuates with share price day to day, while Total Debt and Cash are taken from the most recent quarterly financial statements available. That’s why we share this report each week - to keep up with changes in the stock market, and to update for quarterly earnings reports when they drop.
Historically, a 10x NTM Revenue multiple has been viewed as a “premium” valuation reserved for the best of the best companies.
Efficiency Benchmarks
Companies that can do more with less tend to earn higher valuations.
Three of the most common, and consistently publicly available, metrics to measure efficiency include:
CAC Payback Period: How many months does it take to recoup the cost of acquiring a customer?
CAC Ratio is calculated as: (∆TTM Sales * Gross Profit Margin) / TTM S&M
CAC Payback Period is calculated as: (1 / CAC ratio) * 12
Note: Some may measure CAC Payback using the change in last quarter’s revenue x 4, but I believe this overstates a company’s progress if they are growing fast, and the output can be volatile due to quarterly sales seasonality. That’s why I look at it on a Trailing Twelve Month Basis.
Rule of 40: How does a company balance topline growth with bottom line efficiency? It’s the sum of the company’s revenue growth rate and free cash flow margin. Netting the two should get you above 40 to pass the test.
Rule of 40 is calculated as: Total Revenue Growth YoY % + Non Gaap Operating Profit Margin %
Non Gaap Free Cash Flow is calculated as: Net cash provided by operating activities, minus capital expenditures and minus capitalized software development costs.
Revenue per Employee: On a per head basis, how much in sales does the company generate each year? The rule of thumb is public companies should be doing north of $450k per employee at scale. This is simple division. And I believe it cuts through all the noise - there’s nowhere to hide.
Revenue per Employee is calculated as: (TTM Revenue / Total Current Employees)
A few other notes on efficiency metrics:
Net Dollar Retention is another great measure of efficiency, but many companies have stopped quoting it as an exact number, choosing instead to disclose if it’s above or below a threshold once a year. It’s also uncommon for marketplaces and fintechs to report it at all.
Most public companies don’t report net new ARR, and not all revenue is “recurring”, so I’m using annual change in TTM revenue timeframes as a proxy in my calculations. I admit this is a “stricter” view, as it is measuring change in net revenue, rather than gross revenue additions pre-churn.
Operating Expenditures
Decreasing your OPEX relative to revenue demonstrates Operating Leverage, and leaves more dollars to drop to the bottom line, as companies strive to achieve +25% profitability at scale.
The three most common buckets companies put their operating costs into are:
Sales & Marketing: Sales and Marketing employees, advertising, demand gen, events, conferences, tools
Research & Development: Product and Engineering employees, development expenses, tools
General & Administrative: Finance, HR, and IT employees… and everything else. Or as I like to call myself “Strategic Backoffice Overhead”
All of these are taken on a non Gaap basis and therefore exclude stock based comp, a non cash expense. SBC is still an important figure to track for total comp and dilution purposes, though.
All benchmarking data provided by Virtua Research.
For assistance with your own benchmarking and equity research needs, contact cventi@virtuaresearch.com.
Tell him CJ sent you; he'll hook you up!"
thanks for the post