The 3rd Edition of McKinsey’s “Valuation: Measuring and Managing the Value of Companies” opens with an examination of shareholder capitalism. The short version: when companies are oriented towards shareholder value creation economies perform better, so companies should prioritize shareholders. Per Investopedia: “Shareholders are always stakeholders…but stakeholders are not always shareholders. A shareholder owns part of a public company…while a stakeholder has an interest in the performance of a company for reasons other than stock performance or appreciation. These reasons often mean that the stakeholder has a greater need for the company to succeed over a longer term.”
As we consider the shareholder / stakeholder debate, we also recall commentary from a 1993 article by Peter Lynch in which he writes, “there are two kinds of investor’s edges…and the consumer’s edge, with which you can capitalize on your experiences in restaurants, airports, and shopping malls. In fact, of the 20 top-performing stocks on the NYSE in the last decade, no fewer than six have been stuck under the noses of millions of shoppers…” To put some words in Lynch’s mouth: where you are a happy stakeholder, perhaps you should always be a shareholder! Since much has been speculated about retail investors driving the insane prices we’ve been seeing in the markets over the last few months, we must ask – is this necessarily a bad thing? If individuals are so in love with a company that they’re actually buying its stock, shouldn’t that give us confidence that the business will outperform regardless of current price long term?
And if the retail participation is to be believed and embraced then this “stakeholder to shareholder” conversion may also be an underappreciated factor driving enterprise SaaS prices today, specifically for the subset of SaaS companies we here at OpenView have deemed to be product led growth businesses. These companies engage and delight millions of business users as if they’re consumers (they prioritize their stakeholders). Product led companies are more likely to be top of mind for retail investors and attract “stakeholder shareholders” who want to support the long term success of the company – both as users and stockholders, no matter the stock price – to make their working life better.
As of yesterday’s market close the median enterprise value to NTM revenue multiple for the PLG index we created is 17.2x, while the non-PLG companies trade for just 10.3x (that’s a nearly 70% difference). The PLG index multiple is up 139% from March 23rd lows while the median multiple for the non-PLG SaaS companies is up only (“only”) 72% over the same period. It may be coincidence, or it may be that more value is created by prioritizing shareholders and stakeholders.
Financial Resources
SaaS Benchmarks
The three most important things we learned after surveying more than 500 SaaS companies last year were (1) only two things matter to founders: product execution and go-to-market execution, (2) teams composed of individuals across diverse geographies, races, ages and genders perform better and (3) the balance of growth and best-in-class SaaS metrics is your best hedge against future uncertainty (sort of like what we’re experiencing today). This week we launched our fourth consecutive SaaS benchmarks survey. This year the survey explores more than just metrics, covering a current topics such as the business impact of COVID-19, strategies used to adapt to recession, founder attitudes, diversity in tech and lots more. Data is key, so if you’re a SaaS executive, please consider participating here. The survey takes ~10-15 minutes, data is reported at an aggregate level, and the report will be released in October (in time for 2021 budgeting)!
Capital Markets Resources
Market Updates
The SaaS index and therefore the SaaS-heavy NASDAQ finished the week down (SaaS -7.89%, Dow +2.29%, NASDAQ -1.76%, S&P 500 +1.25%). Both the SaaS index and NASDAQ are now trading at only their late-June all-time-highs but the downward motion in the index this week comes after a fund manager survey noting that tech is the most crowded trade ever. If anything, the lack of performance this week feels like a healthy rotation vs. anything more sinister. Outside of equities, we have been remiss in not highlighting that there is another index that is performing strongly and up year-to-date… US Treasuries! While yields are down nearly 70% Treasuries have returned just over 9% YTD given the Fed’s involvement, which of course spills over into the equity markets in outperformance. This outperformance in the equity markets is driving more companies to file for public offerings… but more from us on that next week.
Economic Data
As one newsletter noted this week “Congress is a Month Away from Cutting The Economy’s Fiscal Life Support”. As jobs data continues to trend in the wrong direction, the government remains quiet on new stimulus / the expiration of existing government support approaches, and case rates continue to increase across the United States there is an increasingly fearful sentiment brewing. But with that said, we appreciated a glass half full read on the economy from Steve Andrews at Webster Bank, who wrote this week that “Uncertainty over the virus and the political outcome of the November elections will haunt the markets in coming months but, behind the scenes, rates are at all-time lows, liquidity is abundant…This, plus the desire of the majority of consumers and companies, which are learning and adapting quickly, to get things back to some semblance of normal, should help sustain the recovery over the second half of this year…”
Other Financial & Capital Markets Reads (what else we’re reading)
The public SaaS stocks we track closed the week trading at 10.6x 2020E revenue (versus 12.3x as of 7/10). Notes on the Crises. Letters from an American.