Dec '19 SaaS Index 📈 + Honey Acquisition 🍯
Performance of SaaS Index since 2014 and Why Paypal Bought Honey
👋 SaaS Investor & Builder 👋
Jon and Howard here 🙋♂️.
We send newsletters to our paying customers on the overall SaaS market and analysis on an interesting Fintech, SaaS, or B2C Subscription company.
This week, we share our newsletters with all users of Public Comps and cover how the overall SaaS market is doing relative to other VC funds and why Paypal bought Honey.
Key Takeaways
👉Public SaaS Index Takeaway: In the last 5 years, if you invested in the Public Comps SaaS Index, you'd be up 3.3x with a ~27% IRR and perform better than the S&P (~10%) and other top tier VC funds (10-23%) like KPCB, A16z, USV, etc of the same vintage year.
👉Honey $4B Acquisition Takeaway: Our guess is that Paypal paid 20x 2019E revenue because it’s looking to differentiate from Apple Pay, Stripe, and Adyen on the merchant side by helping with user conversion and bringing Honey's 14 million MAU that are mostly millennials as potential customers. More immediately, Honey generates $12-14 revenue per user from affiliate marketing and can serve to help monetize Venmo's and Paypal's core user base by increasing revenue by ~$600m net revenue by charging & helping merchants.
Public SaaS Index - December 1st, 2019
Howard and I decided to construct our own SaaS Index of 80 companies. The Bessemer Cloud Index is a great way to track SaaS versus the market but it's currently "under construction".
👉Takeaway: In the last 5 years, if you had invested in Public Comps SaaS Index, you'd be up 3.3x with a ~27% IRR and perform better than the S&P and other top VC funds of the same vintage year (2014)
S&P 500 is ~10% IRR since 10/22/2014
Prominent VCs with 2014 vintage fund performed anywhere between 10%-23% IRR
Here's how 27% IRR matches up with other venture funds net IRR (after fees) that started investing in the same vintage year (2014).
It's incredible to think if you invested broadly in the Public SaaS market in the last 5 years, you would've outperformed some of the most well-known venture funds like Kleiner, USV, and A16z (while having access to liquidity)! Whether or not this holds up is to be determined -- next week we'll do an analysis of how you'd have performed if you invested in only the "highest" quality SaaS companies.
Sources
🍯 Honey got acquired for $4b in cash by Paypal 💳
Summary on Honey
🤔Description: Honey helps users find the best deals online. Automatically finds and applies savings for consumers across 30k merchants via browser extension. Consumers get, say, 1-10% cash back in Honey reward points and can redeem for gift cards. Consumers win because know they got "a great deal". Merchants win because Honey helps convert consumers (67% are millennials which are valuable!) to buy from their e-commerce site. Honey wins because gets % of revenue from merchant for helping convert customer.
🔥Revenue: $100m net revenue 2018 growing 100% according to Paypal conference call
🙌 HoneyUsers & Benchmarks: 14m monthly active users (Fintech Benchmarks: Robinhood has 6m brokerage accounts '18, Dave 3.5m registered users, Chime 4m customers, Venmo 40m active users)
✌️Merchants Partners:Booking.com, Dell, Sephora, Walmart, Macy, Hulu, Etsy, Kohls, Priceline, American Eagle, Expedia, etc.
👉Employee: 350 employees so ~$285k revenue/employee 😲
⚔️Winner in Promo/Coupon Chrome Extn Market: Honey 10m+ downloads , Ebates 3m , Wikibuy 4.5m, Retailmenot ~400K.
👍Capital Efficient: Profitable & only raised $55m to date ($>2 revenue : $1 raised!)
💰Investors 👏: Anthos Capital, Mucker Capital, Cendana
Public Comps Analysis
Acquisition Price: Paypal paid $4b in cash and with $100m net revenue in 2018, that's 40x 2018 Revenue. Assuming Honey doubled since 2018, business is ~$200m net revenue so the acquisition is 20x EV/2019 Revenue. 😲
In comparison,
Rakuten bought Ebates for 6x EV/net revenue ($1b on $164m net revenue)
Paypal trades for 6.7x EV/2019 Revenue.
Zoom and Datadog trade for 24 and 22x EV/2020 Revenue respectively (though Honey is definitely NOT a B2B SaaS company and shouldn't be comped to these set of companies)
Needless to say, Paypal decided to pay top 💵for Honey so it's important to understand why they did.
Why did Paypal Buy Honey?
Paypal's Business Model: Paypal is really a two-sided marketplace by facilitating online payments between merchants and consumers. Its primary business model is taking 2.9% of the transaction from merchants for successfully facilitating online payments between the 24m+ merchants and Paypal's over 295m users. Consumers pay nothing. The more consumers that have a Paypal account, the more likely merchants are to sign up for Paypal as an easy means to accept online payments.
Paypal and the threat of Stripe, Adyen, Apple Pay: Paypal is facing stronger competition with Stripe (SME), Adyen (Enterprise), and Square (Merchant POS) wrestling with them for merchants. Adyen is ~$460m net revenue last 12 months growing 41% with 56% EBITDA margins (!) with a $22.3b enterprise value. Stripe just raised at $35b valuation and assuming a similar ~48x EV/Net Revenue, Stripe is likely in the ballpark of $730m net revenue likely growing in the 40% YoY range. These online payment processors differentiate by providing better developer experiences (e.g Stripe vs Paypal Braintree), lower cost (e.g Adyen vs Braintree), or having a particular market focus (Stripe in SME vs Adyen in Enterprise). On the consumer and P2P side, Paypal & Venmo are competing with Square Cash and Apple Pay for better consumer buying experiences. If a consumer had the choice between using Apple Pay (+ Apple Card with 3% cashback) to pay for an online product on their mobile device or having to remember their password and sign onto Paypal, the consumer would likely choose the Apple Pay (and displacing usage of Paypal!).
Owning Product Discovery through Check-Out: I suspect Paypal acquired Honey to change the user flow of how users are discovering products (traditionally via Google Search, Instagram, Youtube, or Amazon), comparing prices & deals (Google Search, Amazon, Daily Deal websites) and then ultimately purchasing with Paypal checkout. The implication is Paypal has a truly unique value prop that Square, Stripe, Adyen, Apple Pay don't have for acquiring consumers: giving "deal hunting" Millennials the perceived "best deal" possible which would drive payment conversion and therefore help merchants with the costly cart abandonment problem. The sell to merchants is this: instead of paying Facebook or Google as part of CAC, Paypal/Honey will bring users to you (Honey has over 14m) and will even drive down card abandonment rates because millennial users will feel like they have the best possible deal at check out and click "Buy with Paypal". To my knowledge, the other online payment players don't offer anything close to this.
Monetizing Venmo and Paypal Consumers: Venmo currently has 40m+ users growing total payment volume 73% YoY with $300m of revenue. Paypal has over 295m total active accounts. Honey in comparison has 14m monthly active users and likely ~$200m revenue which implies Honey makes $14 net revenue per MAU in affiliate fees. Given Honey's value prop to users is "we save you money", I wouldn't be surprised if >30% or 12m+ Venmo users download and use Honey which would drive an additional $170m of net revenue for Venmo. The same logic could apply for Paypal and a 10% conversion rate would be 30m+ new users for Honey which would be an additional $420m of net revenue. An incremental of $600m net revenue from just plugging in Honey to Paypal's user base would imply ~$800m net revenue for Honey in 2020. That makes the $4b price point look a lot more reasonable!
Sources