SaaS IPO companies, and how they use debt

Hint: this is not the land of highly leveraged loans.

Recurring revenue streams associated with the SaaS business model have become an increasingly acceptable asset to finance (lend against) for companies of all stages.

Private pre-profit SaaS companies now have more financing options than ever with respect to fully dilutive (equity), partially dilutive (term loan with warrants), or non-dilutive (mrr lines, royalty loans) growth financing solutions.

But how do the world’s fastest growing, most valuable private companies utilize debt? In short…prudently.

We took a look at S-1's for a sample of 35 enterprise SaaS businesses that went public over the past 10 years (or are in the pipeline as of March 2017). We also contrasted this data with smaller private Saas company leverage benchmarks.

Here are a few takeaways.

#1 – Debt usage ranges widely

Of note, more than 70% of SaaS IPO companies have debt facilities at IPO (but >25% have none).

SaaS Pre-IPO companies (per S-1 data)

Six companies had Debt-to-MRR multiples >6.0x while nine companies had Debt-to-MRR multiples <3.0x. In some cases companies had de-leveraged prior to IPO, while others had recently put in place an undrawn line of credit and/or term loan facility, perhaps for pre-IPO liquidity window dressing.

#2 – Non-debt users tend to be larger, faster growing, but have higher burn

SaaS Pre-IPO companies (per S-1 data)

While low-cost debt facilities were undoubtedly available to the faster-growing segment, one can surmise that these higher valued companies are foregoing debt usage given the availability of attractively priced equity and perhaps resistance to using cash for debt service.

One can also infer that the somewhat slower growing companies (with lower valuation multiples) tend to use debt more strategically as low cost growth capital in complement to their equity financing. Of note, there is no material difference in the typical subscription mix of the debt users vs non-users.

#3 – Perhaps defying expectation, at >90% prevalence, debt usage is more prevalent with smaller private SaaS companies than with the larger, later stage pre-IPO companies.

SaaS "small private" companies

Source: Pacific Crest SaaS survey 2016; SaaS company size $5-$40m revenue

It is interesting to note that nearly all smaller companies are using debt as a complement to their equity capitalization, with median debt-to-MRR multiple comparable to that of the later stage pre-IPO group.

Parting thoughts

Debt financing has a meaningful role in the financing of SaaS businesses of all stages. Usage prevalence is skewed toward earlier stage private companies perhaps not yet, or never destined to be on the IPO track.

Of course, emerging SaaS companies tend to employ debt prudently. With median debt levels typically less than 6-8x MRR range, and typical enterprise valuations in the 3-7x ARR range, debt in this realm tends to represent a complementary financing strategy, comprising a modest percentage of overall enterprise valuation. Therefore, debt's impact to a company’s cost of capital can be limited.

With that said, debt tends play a valuable role for private SaaS companies as a strategic and situation specific financing tool. This can be for extending cash runway while mitigating equity give-up, complementing recent equity financing, and/or providing meaningful later stage growth capital to accelerate growth, consummate acquisitions, or achieve profitability.

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