The Art and Science of Building Comp Sets

5/12/24 Benchmarks for Operators

May 12, 2024

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The Art and Science of Building Comp Sets

Try as you might, there’s no such thing as a “clean comp set.”

Sure, it’s sexy to draw yourself to look like DDOG and SNOW, who conveniently garner top EV / NTM Revenue multiples - but it’s a total ~~comp~~ cop out (and probably not academically honest).

Designing comp sets is an art project for everyone - I mean, look at Rubrik who just IPO’d. They play in 1) the “Database and Infrastructure” sector with their core backup and recovery product, 2) the “Security” sector with their Zero Trust Security Cloud, and one could even argue 3) the “DevOps”sector with their observability capabilities.

Rumor has it a 1st year Goldman Sachs analyst BUCKLED under the weight of the ppt Venn Diagram template below, which his MD purposefully designed for Rubrik’s comp set.

Identifying an initial Sector is like finding your beachhead for comp analysis; it’s a starting point. You should then go a step further to run that list through the following lenses:

Average deal size (Enterprise vs SMB)
GTM motion (Field Sales vs PLG)
Pricing (Seat Based Subscription vs Usage Based Pricing)

While Toast and Veeva are both “Vertical”, I don’t think a PLG / SMB / Fintech-ish company is a bang-on comparison to a Cloud Based / Enterprise SaaS behemoth. So you have to investigate further.

Recently, a tech CEO who I really respect reached out and asked:

“Would you look at our business as Vertical or Back Office? My investors think I’m more Vertical because we specifically serve B2B SaaS customers.”
-Baller CEO who readers my book report thing

I felt seen. I told him:

“Building a comp set is more art than science. It’s actually the reason I created Mostly Multiples - I was cobbling together bespoke comp sets to measure my own company. This newsletter is a jumping off point for people to better build their own.”

As the CFO of a (takes deep breath) Cloud Based Automotive Procurement Platform, I personally weight my own company as:

50% Vertical SaaS,
25% Backoffice, and
25% Marketplace.

But hey, that’s just me. Benchmarking is, at the end of the day, in the eye of the beholder; it’s my job to paint the landscape and ultimately let others pick the final characters for comparison.

So it begs the question - how do you see your business?

TL;DR: Multiples are trending slightly DOWN week-over-week.

Top 10 Medians:

EV / NTM Revenue = 13.8x (-1.0x w/w)
CAC Payback = 23 months (flat w/w)
Rule of 40 = 54% (+2% w/w)
Revenue per Employee = $380K (flat w/w)

Figures for each index are measured at the Median unless otherwise stated

Average, Median, and Top 10 Median are measured across the entire data set, where n = 116
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!"

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