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SMB focus is challenging

We’ve always believed there is a valuation discount for SaaS businesses that focus exclusively on SMB customers.  To see if this is true, we compared publicly traded SaaS companies that focus on SMB customers to those that focus on enterprise customers.  Specifically, we wanted to see if SaaS companies with an SMB customer base trade at a valuation discount to those focused on enterprise clients.  Our findings are below, and they surprised us.

 

SMB only is rare.  Of the 81 SaaS businesses we monitor, there are only 4 pure play SMB companies.   Conversely, there are 37 companies that focus strictly on enterprise customers and 32 companies that focus on both.  This has led us to conclude it is very challenging to become a large, successful publicly traded company by focusing on SMB alone.

SMB trades at a premium.  While we only found 4 SMB focused companies, their median revenue multiple was a strong 12.0x while for enterprise it was only 6.8x.  This really surprised us as we’ve always believed SMB customers are worth less than enterprise.  It’s likely because the YOY growth of these SMB focused businesses (53% median) is more prolific than their enterprise focused counterparts (36% median).  We’re not surprised that SMB grows faster since the sales cycles are shorter and there are many more SMB’s than there are enterprises in any given market.

Enterprise is ubiquitous.  Of the 81 companies we researched, 76 of them serve enterprise customers.  This leads us to believe the probability of building a big successful SaaS businesses improves for those SaaS co’s that do serve enterprise customers whereas focusing on SMB only is a hard road since there are only 4 publicly traded SMB focused companies.

 

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