Having very recently written a piece praising the way in which HR platform provider, Zenefits, was successfully disrupting major industries by delivering great SaaS, revolutionizing the current business model in those industries, and having the cojones to go after the market in a big way, I wasn’t surprised to hear the news on Wednesday that the company had raised $500 million in its latest round of funding. Investors, far more astute than I, could surely recognize the solid fundamentals and sky-rocketing growth trajectory of this rising star of SaaS. What did surprise me, however, was the valuation of Zenefits at $4.5 – 5 billion!

In case it needed to be clarified, I’m a big fan of Zenefits and do expect to see it achieve great success – but my inner undergraduate economist finds it hard to reconcile an ARR of $20 million with a valuation of this magnitude. That same undergraduate economist was steeped in the cautionary tales of Tulipmania, the South Sea Bubble, the Dot-com Bubble, and many more besides – all seen with the 20/20 vision of hindsight as bubbles inflated by gross over-estimations of the true value of various commodities. Now, I am fully aware of the perils of judging SaaS companies on traditional ARR valuation models given the cumulative nature of SaaS subscription revenues but the fact remains that vast amounts of capital are being poured in to Zenefits and many other SaaS companies on the assumption that they will continue to grow at a blistering pace.

The fact remains that a SaaS company needs to lose quite a bit of money upfront in order to acquire a customer, and it takes significant time to recoup that cost and begin to make a profit on that customer. Zenefits, for example, expects to lose more than $100 million in 2015. Now, I’m not suggesting for a moment that Zenefits is a rare tulip with enormous perceived value that turns out to be worth nothing at all – on the contrary, there is a lot of substance to the company and its metrics are very strong, but do they warrant a $5 billion valuation? The late 1990s Dot-com bubble was based on the assumption of a “new economy” where infinite growth was possible and the boom/bust business cycle was a thing of the past. This, of course, led to a raft of Dot-com companies going to IPO with enormous valuations despite their often negative earnings – and when the bubble burst in early 2000, the stock market crash and subsequent recession taught us a painful lesson about the perils of valuation based on predicted future earnings. Or did it?

As pointed out by Tomasz Tunguz, the ratio of enterprise valuation to current year revenue for SaaS companies has increased exponentially from 3x to 5x pre 2011 to 12x to 20x today while the underlying cost structure and revenue structure of these companies doesn’t appear to have changed. If that seems like a big jump, let’s look at Zenefits one more time. Although they may be an outlier among SaaS companies in terms of their earning potential, assuming Zenefits hit their target of $100 million ARR by the end of 2015, their recent valuation will still be between 45x and 50x their revenues. Regardless of the deferred earnings inherent in the SaaS business model, this looks to me like significant over-valuation of a two-year old company that has proven its ability to acquire customers but has not yet had the chance to prove its ability to retain those customers and to drive the life time value to achieve profitability in the medium term.

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Nevertheless, these kind of valuations during the dot-com bubble were based on very flimsy metrics indeed, while today’s SaaS investors are more likely to value a company based on solid financials. Clearly we can’t judge SaaS companies by the strict current earnings per share model by which traditional software vendors were judged, but surely some valuation standard needs to be set that cautiously takes factors that may diminish predicted future earnings like churn and the impact of freemium business models in to account. To adapt Hans Christen Andersen’s fable, I’m not saying that the emperor is wearing nothing at all, but he might be more scantily clad than popular opinion would lead us to believe.

Michael Cullen is cofounder of SaaScribe, an online publication with an editorial focus on the SaaS industry. You can follow him on Twitter @michaelcullen87.