Recently I was talking to an entrepreneur that has sold his last company and is actively looking for a new business to either start or join. As we got to talking, it became clear that his goal is to get involved with a pure Software-as-a-Service (SaaS), as opposed to a tech-enabled business service where there’s a hybrid between proprietary technology and human-powered services. Some of his drivers for a pure SaaS business include higher valuations at the same revenue levels, greater economies of scale, and perception that there are better opportunities.
Assuming a pure SaaS business is the goal, here are a few financial model considerations to contemplate:
- Gross margin (especially at scale e.g. > $20mm in revenue)
- Cost of customer acquisition
- Lifetime value of the customer
- Renewal rates
- Scalable lead generation
The ideal SaaS business will have high gross margins (> 80%), low cost of customer acquisition (< first year’s revenue), high lifetime value of the customer (many times the acquisition cost), high renewal rates (> 90% per year), and copious amounts of leads.
What else? What are some other ways to evaluate the purity of a SaaS business?