Recurring revenue: Scalability’s secret sauce

By John Leonard, Senior Managing Director, Division Manager, Technology Finance, Wells Fargo Capital Finance

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.

Evolution of recurring revenue models

What started as standard on-premise license and maintenance models back in the 1990s and 2000s have evolved to become 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.

Determine underlying value by understanding and articulating quality of recurring revenue

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 aid internal budgeting efforts.

Coupled with improving data security, this trend appears likely to continue for the foreseeable future.

Tech expertise your company needs

Given investors’ continuing search for yield in 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 lender that truly understands their business and has proven its dedication to serving the industry throughout economic cycles.

Look for a company with deep industry expertise, long-tenured work within this market, flexible and competitively priced structures, and dependable execution in short time frames.

With a wealth of expertise in a wide range of technology-focused banking areas, we take pride in seeing your business from every angle. Here’s a closer look at some of our takes on tech: https://welcome.wf.com/tech-banking/insights.html