Will chime in with another valuation metric for a company like HelloSign: attach rate [1]. In this case this concerns how much of DropBox's (much bigger) customer base can be persuaded to buy HelloSign's products due to single sales process, tight integration, etc.

DropBox has ~300k paid business accounts. HelloSign is ~$500/yr for their basic small-business (not solopreneur) plan (I believe HelloFax is separate and starts at ~$100/yr).

Assume DropBox can sell e-signing to a third of their business customers, that means HelloSign would be (relatively quickly) worth $50mm/yr in revenue to DropBox. This is before accounting for any sell-through of HelloSign to their ~11mm paid individual accounts, or any sales at all at HelloFax. (I'm sure both of these are a part of an actual investment thesis.)

Also note this assumes HelloSign comes into the deal with zero non-DBX customers, which is obviously not true. HelloSign is also doing valuable new work, so I would expect these numbers to be on the low side of expected outcomes.

Is $50mm/yr worth it? DBX currently trades ~7x revenue, so that $50mm in incremental revenue is, all things equal, worth about $350mm in market cap for DBX. So their backstop is they are buying $350mm++ in market cap for $230mm.

1 - https://en.wikipedia.org/wiki/Attach_rate

Would you say this is another way to explain the value of distribution channels/bolt on acquisition?

A company can have an incredible product and weak distribution (and not be very valuable per se), but the company’s value can be multiplied by a lot if the product can be folded into a very strong distribution channel (salesforce, for example).

Great thoughts on CAC, etc. certainly a fair way to value a sale.

Also, a few things

1) How much would it cost for Dropbox to build and acquire/steal those users?

2) Even if 1) is not that high, what is the opportunity cost for dropbox to do so? Yes, they could move a bunch of engineers and PMs to work on it, but then they wouldn't be working on other more important parts of Dropbox.

3) It's not always about how much you get by buying a competitor, it's sometimes about how much you will lose in the long-term if that competitor doesn't go away. Think Instagram and Facebook. $1B sounded crazy back then, but how much would have Facebook lost if instagram kept growing and growing?

> but can someone tell me roughly why they might have come up with the $230M number?

M&A guy here. Generally companies are valued at EBITDA * Multiple. However when it's a strategic acquisition (which this is) then they tend to adjust EBITDA around an investment thesis. For tech companies, this adjustment can be fairly drastic and multiples can get crazy (general market is about 9x right now, but 15x+ for software providers). There are too many theses to enumerate here, but some commons examples cost takeout, customer cross-sell, resource consolidation, etc.

That’s all fine and dandy but EBITDA * X = Y is solvable for literally any Y so long as EBITDA is nonzero. You just have to pick the “right” X, which makes this formula essentially meaningless. You can have a negative EBITDA and still be purchased for millions (indeed this is “common” for startups).

The reality is that the buyer pays an amount they think they can make back in some reasonable timeframe by some means.

> pays an amount they think they can make back

You're correct - there is some ROI associated with the acquisition price, and that ROI is generally driven by earnings potential, and hence the adjusted EBITDA.

Right. The "adjustment" seems to have such a wide range that it makes it almost meaningless, though. Or put another way, I feel like Price/EBITDA produces a number that can be valuable for the sake of sanity checking an offer. It doesn't seem valuable in the other direction. i.e. The multiplier is an output rather than an input to the formula. Picking a multiplier first is basically arbitrary. Comparing the multiplier a price yields has some value but doesn't really drive the price choice.

Esignature is a huge business and the incumbents have a high cost structure or a history of excessive price increases. (Would you want to build your strategy around Adobe?)

This gives Dropbox something to anchor against. Both Google and Microsoft improve every quarter, while Dropbox is mostly the same, with the same premium pricetag. I could move my whole company to Dropbox for a couple of million, OneDrive is $0.

Yeah, but I get a lot more value from DocHub. HelloSign is not that good as a product anyway. Lame purchase, which would only increase my cost of Dropbox, which will force me to move to Google One. So, essentially, Dropbox is stupid squared. DocuSign and Adobe are still leading in the e-signature space.

I'm with you, and just moved to Google One myself (after subscribing for almost a decade). The value for dollar just isn't there for most use cases -- it's not worth paying 2x for a product missing key features like fulltext search and dealing with the constant, never ending upsell.

Dropbox seems to be hyper-focused on a market of graphics and other professionals where the speed to sync is their primary benefit. That seems like an unwise strategy to me, but I can see where those users would benefit from an esignature solution.

HelloSign also has a history of excessive price increases.

We were using this in our app when it suddenly became ridiculously cost prohibitive to do so, so we had to remove it.

As a second data point, we looked at HS, too. We alter our templates so often that their inflexible pricing rendered them completely out of the running. Other e-sign solutions were just as bad in that respect. IAAL, and the dirty secret is that “handwritten” scrawls aren’t required to form valid electronic contracts. It’s purely a measure to assuage the social presumption that a thing is locked in when all the parties scribble on it. So, we rolled our own workflow with clickwrap assent instead.

We did something similar. Needed e-signatures in our SaaS HR app but when considering all players in the market, including HelloSign, it was really cost prohibitive. We ended up rolling our own e-signature functionality which our users are totally happy with.

Correct it’s the intent. Capturing consent, auditable trail, with a dash of tamper seal and a sprinkle of sugar ;) (do not take my comment as literal advice, also my comments do not represent my company and are my own.)

revenue * multiple

let's say $10m in ARR * a 23x multiple

The way you get to the multiple is a combination of how fast the revenue is growing, how long you think that will keep up, and the margin of the revenue.

Craftsman Tools, for example, was probably not growing much or shrinking and likely had low margin revenue but I don't know.

Revenue is almost meaningless. At least use a multiple of profits or of net income.

You know, you can have a crazy revenue, and still lose money, and your company can be bankrupt in a few months.

Those issues end up being reflected in the multiple.

Revenue * multiple is just a common way of talking about it, especially because companies within the same industry tend to have similar multiples. In reverse if you notice two public (since the information is easy to find)companies with seemingly-similar businesses that have very different multiple, you can start looking into why, and the quarterly financial reports with high-level numbers like cash burn, outstanding debt, profits, or net income would be a great place to start :)

> Revenue * multiple is just a common way of talking about it, especially because companies within the same industry tend to have similar multiples.

This is the common way media talks about it, either because they are (1) uniformed or (2) they only hear of top line revenue.

Companies are typically acquired for EBITDA * Multiple. However when their is a "strategic" acquisition (which this one is) then there is all sorts of weird math that potentially goes on.

Examples: (napkin math)

- Company being acquired has $100M in revenue, and $20M in EBITDA. Post close, they realize $20M in synergies, so they might buy the company at 20x * $40M Adjusted EBIDTA ($20M EBITDA + $20M new EBITDA from synergies)

- Company being acquired has $100M in revenue, and $20M in EBITDA. The acquirer is going to remove 100 engineers post close (100120k/yr = $12M) and therefore the new EBITDA is going to be $32M, and the company gets bought at 20x $32M EBITDA

At the end of the day, the ROI is really what matters.

It's also worth noting - most M&A does not realize the hypothesized deal value. So yes people are right to be critical, but without full details, being precise about what the true value of a company is nigh impossible.

All acquisitions are “strategic”. Even holding companies acquire assets that they believe accrue toward their strategic vision.

The EBITDA calculation is at best a sanity check for the acquirer.

> All acquisitions are “strategic”.

I'm just using industry nomenclature. When people sell to a PEG, they don't say "we're selling to a strategic".

correct

I said the multiple is based on the margin of the revenue, aka, how profitable the revenue is.

Revenue is the proper starting point as it is the thing that can or can not be optimized and grown. Profitability of the revenue (now vs. future) is obviously a huge driver but it is not the right starting point.

In the formula you provided how is the number for the multiple arrived at? Is that the multiplier that will be realized at some future date based on the current rate of growth? If so what would that future date be - the next round of funding, an IPO, something else?

It depends on the margin of the revenue and the growth rate primarily

So is there a generally accepted formula for calculating that given those two inputs?

Would revenue or assets be used?

So once the accounting statements are reviewed, then most of the acquisition talk is just a discussion over a multiplier?

It all factors in but realistically with SaaS there is little in terms of fixed assets.

Most likely a lot of the additional factors for the valuation multiple calculation are going to be around efficient customer acquisition, sales cycle payback periods, and different income percentages (operating, net). X factor would be if other competitors of the acquirer are also bidding on the acquiree.

Depends on the business. Something like Zipcar or similarly asset-heavy would incorporate assets in an MnA valuation, but SaaS would not unless they're flush with valuable patents.

I've always wondered this myself. I ended up taking a course on financial valuations. My novice takeaways were there were two approaches:

1. An intrinsic, detailed "bottoms up" approach by projecting future cash flows and discounting their value back to the present day. There might be 2 stages, the first years of explicit growth assumptions and the second along some kind of long term growth rate.

2. A market based, "top down" approach where you find comparable transactions and make adjustments for different levels of investment, leverage, to try to get an apples to apples comparison.

In either case, you also factor in gains you'd get from a strategic acquisition like eliminating redundant departments. Compare this to an acquisition by a PE firm, that doesn't do anything other than buy and sell equity in companies.

What I realized was it wasn't a science. Sure it deals mainly with numbers. And from an outside party you think it's this really rigorous, matter of fact assessment. But there's lots of areas where there are just guesses, albeit with a lot of money.

I hate faxing and signing real documents. Hellofax fixes that and I've been using it since 2011 or something.