SaaS Funding Relative to Recurring Revenue

Recently I was talking to an investor and he mentioned they were looking at a deal, liked the company, but were concerned with how much cash the startup had burned relative to current annual recurring revenue. For Software-as-a-Service (SaaS) startups, it’s especially difficult to get the business model going, and once it’s going, it’s especially cash-intensive to scale it.

Here are some example ratios to consider when analyzing funding relative to recurring revenue:

• Seed Round – 8:1 ratio of funding to revenue (e.g. $800k raised and $100k in new annual recurring revenue)
• Series A Round – 3:1 ratio of funding to revenue (e.g. $3 million raised and $1 million in new annual recurring revenue)
• Series B Round – 2:1 ratio of funding to revenue (e.g. $12 million raised and $6 million in new annual recurring revenue)
• Series C Round – 1:1 ratio of funding to revenue (e.g. $20 million raised and $20 million in new annual recurring revenue)
• Example Total: $35.8 million raised with annual recurring revenue of $27.1 million

Note: this assumes the money raised has been spent, while most startups haven’t spent all their cash. Startups that are doing great would see these ratios cut in half (e.g. they are twice as efficient growing revenues relative to money spent). There’s no exact formula for the ratio of funding to new annual recurring revenue, but this is directionally correct.

What else? What are some more thoughts on SaaS funding relative to recurring revenue?