1 Metric Matters on Multiples: See the Mulesoft CRM Acquisition by Salesforce

This one factor predicts 74% of the multiple on software companies with good margins.

Mulesoft’s $6.5B acquisition locks the case on hypergrowth.

As software companies are building, they have tough choices to make–growth, features, nice to have’s, go long or prize growth now? Thoughtful investor and Redpoint partner Tomas Tunguz just posted an article about SalesForce and Mulesoft CRM that drives the value of hypergrowth home.  Here’s his data on acquisitions of software by enterprise software companies–

Transaction Price ($M) TTM Rev ($M) Growth Rate Gross Margin Year of Acquisition Enterprise Value EV/TTM Rev
Salesforce/Mulesoft 6,500 297 58% 73% 2018 6,296 21.0
SAP/Concur 8,300 546 32% 63% 2014 5,988 11.0
SAP/SuccessFactors 3,764 328 59% 66% 2011 3,599 11.0
Salesforce/Demandware 2,800 274 40% 71% 2016 2,502 9.1
Oracle/Eloqua 957 95.8 34% 72% 2012 864 9.0
SAP/Callidus 2,400 253 22% 61% 2018 2,247 9.0
SAP/Ariba 4,607 517 27% 66% 2012 4,390 8.5
Microsoft/LinkedIn 26,500 3615 30% 87% 2016 24,385 6.7
Oracle/Responsys 1,770 194 25% 53% 2013 1,291 6.7
Oracle/Taleo 1,921 315 33% 67% 2012 1,805 5.7
IBM/Kenexa 1,397 333 25% 61% 2012 1,332 4.0

Mulesoft CRM Acquisition–case in point

Tunguz used this data to plot growth rate against acquisition multiple and came up with an interesting relationship–74% of the size of the multiple is determined by the growth. Or,  as he wrote so concisely, “Growth is the best predictor of multiple, with a 0.72 R^2.” Salesforce’s planned acquisition of Mulesoft is a history maker at 21x the last year’s revenue, but Tunguz is not alone is seeing more opportunities where the growth premium will come into play.

By implication, there are 3 key take aways if you’re involved in a software company contemplating an enterprise exit.

  1. Growth is going to get you the best premium in your sell price–and also your next financing.
  2. Not-growing is a no-go. You’re not buying time when you choose not to grow, but to invest in . . . (pick your poison) . . . features, timing, nice digs, etc. You’re embalming yourself.
  3. Review point #1. It’s really a two-fer. 🙂

Investing in young companies, you hear people talking about multiples like they’re laws of physics–instead of market tides that rise and fall. This coefficient of determination (r2) Tunguz is spotting will continue to evolve. Still, with enough acquisitions in the market, trends do emerge with relative reliability and this is one of them. The multiple of revenue a software company can be acquired for is one of the most meaningful metrics to focus on as well–it’s the metric that makes money for the founders, the team and the investors. It’s the metric that creates transformational, generational wealth.

Bottomline: the market is increasingly moving to reward hypergrowth, as it has with Mulesoft CRM.

Growth is the one metric that matters in software companies with margins contemplating enterprise or strategic acquisition.