We have all heard how Software-as-a-Service (SaaS) multiples have come down their peaks two years ago.
But not just that. Being in Architecture-Engineering-Construction (AEC) technology, I can’t count how often and as recently as two weeks ago, I get to see PR how awesome some software firms think they are themselves, and how some of them frame themselves as this and that and whatever.
I like to work with numbers and facts. They tell the true story. They don’t always tell the entire story, but they do tell the true story.
So I went out and looked at a few publicly listed AEC software firms and their numbers, and benchmarked it with other public B2B software firms to let the numbers tell me the answers:
What’s the status of SaaS multiples in AEC? What do public investors reward with higher valuation multiples right now?
Can AEC support high(er) valuations as other, “sexier” B2B sectors?
Is PR of some AEC software firms backed up by substance?
What should current early-stage software founders in construction and architecture take away from this for their startup journey?
Here’s what I found, in charts.
I’ll keep the text shorter and let the numbers speak first. I posted my conclusions at the bottom.
Note that all numbers I used are publicly available, published by the respective companies. No proprietary or otherwise private information is used. Numbers are rounded. Primary source I used is Yahoo Finance, and the companies’ annual reports where Yahoo Finance did not provide data.
Let’s benchmark 3 AEC software firms to 3 other software firms that make substantial portions of their revenue with other B2B sectors:
- AEC
- Autodesk (ADSK)
- Bentley (BSY)
- Procore (PCOR)
- Other B2B
- Adobe (ADBE)
- Salesforce (CRM)
- Dropbox (DBX)
I have open-sourced my spreadsheet with all calculations. You can find my spreadsheet with all numbers here and do with it what you want.
Growth first: Procore ahead, although on a much smaller scale (baseline effect?)
What about margins: Who is actually running a best-in-class SaaS business?
Driven by acquisition and retention efficiency: The one SaaS metric that never lies – revenue per employee. Let’s see
While overhead efficiency can reveal how fat converts into revenue (or doesn’t)
And ultimately all of it needs to generate cash: Judge yourself
Now that you saw the metrics: What SaaS valuation multiples are public investors paying currently?
Lazy overview: Benchmarked in one chart
My personal viewpoint
This post is not about any of these firms. Draw your own conclusions about any of them.
My interest lies in what software founders in construction and architecture-engineering can learn from it for their startups and scale-ups.
So let’s circle back to the questions I opened with above:
What’s the status of SaaS multiples in AEC?
- In this sample set, 6.7x to 13.7x on annual revenue (not ARR – that should be lower in most cases due to a forward multiple)
- and 40x to 113x on operating profit (for the profitable firms).
- Early-stage AEC SaaS founders should plan with their long-term forward ARR multiples to be in that same range, around 9-11x.
- Earlier rounds can allow higher multiples, but often not substantially due to the long-term multiple compression. In practice I am seeing up to 40x on ARR prior to Series-A, around 20-25x at Series-A if growth and unit economics are very good (otherwise close to 10-15x), and post Series-B close to the long-term multiple.
What do public investors reward with higher valuation multiples right now (mid 2023)?
- Clearly: Margins and sales & marketing efficiency, plus cash extraction and capital efficiency.
- Growth might not be a differentiated factor in this sample-set as much as you think – the fastest growing firm comes from the lowest revenue and what you see is a baseline effect, not necessarily faster expansion. If you express the growth in absolute terms:
- Autodesk added $1.7B in annual revenue since 2019
- Bentley $350M
- Procore $430M
- Adobe $8.5B
- Salesforce $14B
- Dropbox $650M
- If you still are a believer that growth narratives at this scale still get priced in – for how much longer do you think. Do you expect multiple compression in these cases unless efficiency catches up? Be your own judge.
- The cases in this set that warrant closer inspection to understand their valuations (and whether you think they are correct) are Salesforce, Bentley and perhaps Procore. Draw your own conclusions, as I will keep my thoughts to myself.
Can AEC support high(er) valuations as other, “sexier” B2B sectors?
- Yup, AEC software clearly can keep up with other B2B SaaS sectors in terms of valuations.
Is PR of some AEC software firms backed up by substance?
- I conclude that some firms totally deserve their hype. They are great businesses.
- While others might live more from constant storytelling and sales & marketing efforts than fundamentally sound business ?
- To understand the difference – run the numbers.
- Everything else is just propaganda ?
What should current early-stage software founders in construction and architecture take away from this for their startup journey?
- Nail your go-to market motion before you scale. Construction is notoriously complex.
- If you believe in the network and referral effects in construction software (like I do), your product needs to foster that.
- … and your numbers need to prove it. If your numbers, especially ARR / FTE and S&M intensity and CAC metrics don’t show it, don’t feed yourself a BS narrative that you are a platform and have an amazing network-backed sales motion. You would be fooling yourself. Until your numbers prove it, you don’t have it. Go back to two bullets above.
- Don’t believe tech PR. Just don’t.