Would the math work if Databricks were valued at $38B?

Databricks, the open-source data lake and data management powerhouse has been on quite a financial run lately. Today Bloomberg reported the company could be raising a new round worth at least $1.5 billion at an otherworldly $38 billion valuation. That price tag is up $10 billion from its last fundraise in February when it snagged $1 billion at a $28 billion valuation.

Databricks declined to comment on the Bloomberg post and its possible new valuation.

The company has been growing like gangbusters, giving credence to the investor thesis that the more your startup makes, the more it is likely to make. Consider that Databricks closed 2020 with $425 million in annual recurring revenue, which in itself was up 75% from the previous year.

As revenue goes up so does valuation, and Databricks is a great example of that rule in action. In October 2019, the company raised $400 million at a seemingly modest $6.2 billion valuation (if a valuation like that can be called modest). By February 2021, that had ballooned to $28 billion, and today it could be up to $38 billion if that rumor turns out to be true.

One of the reasons that Databricks is doing so well is it operates on a consumption model. The more data you move through the Databricks product family, the more money it makes, and with data exploding, it’s doing quite well, thank you very much.

It’s worth noting that Databricks’s primary competitor, Snowflake went public last year and has a market cap of almost $83 billion. In that context, the new figure doesn’t feel quite so outrageous, But what does it mean in terms of revenue to warrant a valuation like that. Let’s find out.

Valuation math

Let’s rewind the clock and observe the company’s recent valuation marks and various revenue results at different points in time:

• Q3 2019: $200 million run rate, $6.2 billion valuation.
• Q3 2020: $350 million run rate, no known valuation change.
• EoY 2020: $425 million run rate, $28 billion valuation (Q1 valuation).
• Q3 2021: Unclear run rate, possible $38 billion valuation.

The company’s 2019 venture round gave Databricks a 31x run rate multiple. By the first quarter of 2021, that had swelled to a roughly 66x multiple if we compare its final 2020 revenue pace to its then-fresh valuation. Certainly software multiples were higher at the start of 2021 than they were in late 2019, but Databricks’s $28 billion valuation was still more than impressive; investors were betting on the company like it was going to be a key breakout winner, and a technology company that would go public eventually in a big way.

To see the company possibly raise more funds would therefore not be surprising. Presumably the company has had a good few quarters since its last round, given its history of revenue accretion. And there’s only more money available today for growing software companies than before.

But what to make of the $38 billion figure? If Databricks merely held onto its early 2021 run rate multiple, the company would need to have reached a roughly $575 million run rate, give or take. That would work out to around 36% growth in the last two-and-a-bit quarters. That works out to less than $75 million in new run rate per quarter since the end of 2020.

Is that possible? Yeah. The company added $75 million in run rate between Q3 2020 and the end of the year. So you can back-of-the-envelope the company’s growth to make a $38 billion valuation somewhat reasonable at a flat multiple. (There’s some fuzz in all of our numbers, as we are discussing rough timelines from the company; we’ll be able to go back and do more precise math once we get the Databricks S-1 filing in due time.)

All this raises the question of whether Databricks should be able to command such a high multiple. There’s some precedent. Recently, public software company Monday.com has a run rate multiple north of 50x, for example. It earned that mark on the back of a strong first quarter as a public company.

Databricks securing a higher multiple while private is not crazy, though we wonder if the data-focused company is managing a similar growth rate. Monday.com grew 94% on a year-over-year basis in its most recent quarter.

All this is to say that you can make the math shake out for Databricks to raise at a $38 billion valuation, but built into that price is quite a lot of anticipated growth. Top quartile public software companies today trade for around 23x their forward revenues, and around 27x their present-day revenues, per Bessemer. To defend its possible new valuation when public, then, leaves quite a lot of work ahead of Databricks.

The company’s CEO, Ali Ghodsi, will join us at TC Sessions: SaaS on October 27th, and we should know by then if this rumor is, indeed true. Either way, you can be sure we are going to ask him about it.