Cloud IPOs remain hot and so do their revenue multiples

Cloud companies are seeing average revenue multiples of 8.4x this year’s sales.

Cloud is among the hottest areas of the venture-backed IPO market this year and the excitement doesn’t look ready to let up.

A long list of private companies wait in the wings with potentially explosive offerings, such as Box, Dropbox, DocuSign, Evernote and Twilio. Already Veeva Systems and Wix.com are registered.

Add to that the respectable performance of the sector’s most recent offering, RingCentral, and the spark clearly isn’t about to go out. RingCentral, which went public Sept. 27, continues to hold a 31% gain above its IPO price.

So what’s behind the enthusiasm? At its most basic level the excitement is tied to the public market’s growing acceptance of the software-as-a-service business model. Investors got their first taste of this new way of selling software nearly a decade ago with the Salesforce.com IPO.

But more recently, a broader range and great volume of companies have come to market—14 in the past two years—and by and large proved themselves. Revenue growth among these public companies is on average 30% this year, with the deferred revenue in their business models increasing predictability.

“The buy side now believes in the scale and longevity of the cloud market,” said Byron Deeter, a partner at Bessemer Venture Partners. “It is realizing the power here.”

This story first appeared in Reuters Venture Capital Journal. Subscribers can read the original story here. To subscribe to VCJ, please email Greg.Winterton@ThomsonReuters.com

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