Back in January, Mike and I sold Rustici Software to a British company called LTG. One thing I “learned” in that process is that recurring revenue is very valuable to a company (or its owners). As a business, we sell several products on term licenses, either through our Cloud offering, which is SaaS, or our on premise products which require term licenses as well. Our recurring revenue and high retention rates meant that LTG had to pay a premium over what they would have for a services business.
Take a look at the impacts of aaS on the valuations of several software businesses.
This valuation premium that SaaS gets can be seen more precisely, when we compare cloud software companies to the more traditional on-premise software providers. SaaS companies get higher valuations at all levels of revenue growth rates. For example, looking at the charts below, the median revenue multiple for on-premise software companies that grew their annual revenue 30-40% is 5.1x, while the same multiple for a SaaS companies that grew revenue at that same 30-40% rate is 9.2x.
This group of companies was worth 80% more than their non SaaS brethren.
We’ll talk more about Netflix in a subsequent blog post, but they’re a perfect example of a Content as a Service business from outside the elearning world. And they are recognized for their ability to generate recurring revenue and retain customers.
It’s time for elearning providers to do the same. Find a customer, serve them well, provide updates, control the content. And if they do it well over a period of time, both the company’s revenue and value will rise.