Unlocking capital for software companies by understanding the value of recurring revenue streams

The concept of recurring revenue has quickly become a highly sought attribute for debt and equity investors given its underlying predictability and lack of volatility. This dynamic is perhaps most evident in the technology sector, and more specifically business-to-business focused software companies. What started as standard on-premise license/maintenance models back in the 1990s and 2000s has evolved to fully recurring subscription models perpetuated by evolving market dynamics such as cloud computing, SaaS, and Big Data.

The ability to understand and articulate the quality of recurring revenue is paramount to determining underlying value. In fact, many software companies are valued on a multiple of recurring revenue versus the more traditional EBITDA-based valuation metrics. This dynamic is most evident in public SaaS comps, where most companies’ public valuations are metered on recurring revenue, and the generation of positive EBITDA can actually impair valuations. In addition to the investor base, consumers of technology have become increasingly comfortable with SaaS and other highly recurring revenue models due to the lack of large upfront license costs and the predictability of ongoing subscription fees that can aide internal budgeting efforts. Coupled with improving data security, this trend appears likely to continue for the foreseeable future.

Wells Fargo Capital Finance has been at the forefront of this shift in the marketplace. Through our Technology Finance team, we have offered senior secured cash flow financing to recurring revenue-centric companies for more than 15 years. Our team has completed more than 350 transactions in the software and technology space, working with both public and private companies that are looking to strategically grow their businesses, either organically or through acquisitions.

Given investors’ continuing search for yield and a heated credit market, current financing options are abundant – from traditional banks to alternative lending sources. But the real challenge for most companies is finding a financing partner that truly understands their business and has proven its commitment to serving the industry throughout economic cycles. That’s what sets Capital Finance apart from other lenders in this space – our proven ability to understand, value, and lend against a software company’s recurring revenue stream. We pride ourselves on our deep industry expertise, long-tenured commitment to this market, flexible and competitively priced structures, and dependable execution in short timeframes.