Clare Capital was the financial adviser to Environmental Offshore Services on the sale of the business to SLR Consulting.
Environmental Offshore Services (EOS) was a Nelson-based company specialising in offshore oil and gas environmental regulatory regime consultancy. EOS was owned by founder Dan Govier. Services include:
If you haven’t read Clayton Christensen’s The Innovator’s Dilemma, it’s well worth a read and is the basis for this short blog post – providing far greater detail than that presented below. Here we are simply seeding the concept of Disruptive Innovation and how we believe it applies to the SaaS business model.
In a very stylistic view there are two key types of business evolution: Sustaining Innovation – incremental improvement of an existing product or service providing better value for the customer, and Disruptive Innovation – radically different perspective on innovation providing the market with something different from what might be expected by default.
Traditionally financial modelling produces a series of forecast financial statements supplemented with industry specific metrics which management and investors use to analyse future performance. This information can become quite detailed and to support ease of understanding a “Dashboard” presenting summary information is often included as a reporting tool. The concept behind the “Dashboard” is to present a concise (relatively) uncluttered overview of the model outputs to aid decision making. The dashboard often includes a simplified set of statements, metrics and charts to present time series metric information.
We would like to suggest two additional charts that help to visually explaining the financial situation and performance of your business; 1. Hotspot Charts, and 2. Visual Income Statements
[Note: the information presented in the charts below is all from a fictional SaaS company, Company X with no relationship to any actual company performance]
A mash of two SaaS acronyms – CAC being the cost of acquisition and ARPU being average revenue per user; produces a metric which represents the time to payback the initial outlay in acquiring the customer. A simple example, it costs $250 to acquire a SaaS customer via marketing and sales costs (CAC) for a future monthly revenue of $50 (ARPU), in this case it takes 5 months of revenue to repay the outlay (i.e. 5 months of ARPU). The lower the CAC is relative to ARPU, the sooner the customer becomes profitable (assuming cost to serve or CTS is lower than ARPU – if it isn’t perhaps it is time to revisit the business plan).
Within SaaS companies, payback time (i.e. CAC months of ARPU) is a key component of the business’s success. SaaS companies tend to chase growth and customer acquisition in the near term as a pathway to adding long term value. This feature has significant implications on the company’s near term profitability, cash flows and therefore cash requirements – a large CAC months of ARPU results in a large near term expense taking a longer time to repay, therefore requiring significant cash to cover this expense.
“…What do all financial models have in common…” – they are all wrong….
At the core of financial modelling is calculating future cash flows. Nobody, knows exactly what the future holds; therefore how can any model be 100% correct? If they are all wrong, are they of any use? As believers of fundamental structured corporate finance, we would like the answer to be an emphatic yes. However, how useful a model is, is highly dependent on what steps have been undertaken to reduce the potential errors in the model.
This blog is not sales pitch for financial modelling. Nor is it an avenue for outlining good modelling practises to reduce human and calculation errors. Its focus is to establish the assumptions underpinning future cash flows – improved rigour here is directly proportional to the usefulness of a financial model.
Detailed financial modelling often breaks a business operation down to its simplest components – what is being sold/delivered and for what price. It’s these future sales and customer numbers that is the focus of this post, particularly in the relation to SaaS companies.
SaaS, or Software as a Service appears to be the new exciting kid on the block, quite often speaking a completely foreign language. Who is this kid… and what is ARPU, CAC and CMR?
Here at Clare Capital we have been doing financial modelling for several New Zealand SaaS companies (both public and private), during which, we have had a bit of a crash course in the world that is SaaS and would like to pass on some of what we have learnt.
[For those that live and breathe SaaS, feel free to point out anything we misrepresent, for everyone else feel free to contact us for more information].
Congratulations to one of our clients Mindscape for winning the Innovative Hi-Tech Software Product award at the 2014 NZ Hi-Tech Awards for their product Raygun, an automatic crash & error reporting application. Furthermore, they received a Highly Commended for the Innovative Hi-Tech Software Service award.
Mindscape were also nominated for the Innovative Hi-Tech Mobile Product award at the 2014 NZ Hi-Tech Awards.
Clare Capital is very proud of your achievements so far and look forward to where the business is heading.
Congratulations to one of our clients, Mindscape on the capital raise for Raygun.
We are proud to have played a role…
As a sequel to last week’s post about What is the right EV/Revenue multiple? We thought we would follow this up with the same EV/Revenue & ACMR graph – but relating to the six NZX-listed Tech companies. This also coincides with the release of Wynyard Group’s and SLI Systems’ financial statements earlier this week.
ACMR is Annualised Committed Monthly Revenue – which is the most recent monthly revenues annualised. While the size of the bubble represents the company’s overall Enterprise Value.
Chart 1 – NZ Tech companies
This is a question often asked, and is a difficult one to answer. To help visualise the relationship between Enterprise Value (EV), Revenue (ACMR) and the commonly used multiple, EV/Revenue we have created the following charts comparing online companies.
NB: ACMR = Annualised Committed Monthly Revenue, which is the most recent monthly revenues annualised.
Understanding the charts:
Along with each company’s position on the chart representing EV/Revenue multiple in relation to Revenue, the size of the bubble represents the company’s overall EV.
Chart 1 – Low to Mid range ACMR companies
Chart 2 – High ACMR companies