Software-as-a-Service (SaaS) valuations continue to be high, and I believe they’ll be cut in half over the long run. Now, some SaaS companies, even in our current climate, trade in the 2-3x revenue multiple range (see Constant Contact). As startups pitch institutional investors, the inclination is to shoot for the big valuations, as that’s human nature, often referencing the public market multiples as a basis. Only, when making the comparisons, and thinking about valuations, there’s one major driver: growth.
Think about it this way. If a startup is growing at 9% per year, according to the rule of 72, it’ll take eight years for the business to double (72/9 = 8). If a startup is growing at 40% per year, it’ll take almost two years for the business to double. So, the valuation multiple is driven by the historical and expected future growth rate, all else being equal. With a super high growth rate, it doesn’t take long for the business to be substantially larger, and thus significantly more valuable.
When an entrepreneur talks about valuations in the 10x revenue range for SaaS companies, find out the growth rate and see if the math makes sense. Big multiples require big growth rates.
What else? What are your thoughts on growth being a major driver for SaaS valuations?
David Cummings on Startups 
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