Recently I was talking to an investor that had competed to make a SaaS investment last quarter. The desired startup had just over $1 million in annual recurring revenue, a great management team, and a super hot market. After a competitive process, the final pre-money valuation: $60 million.
Why would a well-known venture firm pay 60x run-rate? Here are a few thoughts:
- Fund Size Dynamics – The larger the fund, the larger the checks. If the VC wants to lead the deal, and they usually put in ~$10 million, every investment is going to be in the tens of millions pre-money, whether the startup has $1M or $5M recurring.
- Deal Competition – The best way to raise capital is to create an auction process with multiple bidders. More competition from investors results in a higher valuation.
- Market – There are only so many untapped markets that are clearly large enough to support billion dollar exits. The more obvious the opportunity, the more the valuation goes up.
- Team – Certain founders and teams command a premium (e.g. repeat successful entrepreneurs as well as key prior employers). Ultimately, investors are betting on the team and place tremendous value on it.
While valuations have corrected in many areas, SaaS companies with certain dynamics are still commanding a large premium. Entrepreneurs would do well to understand the current market.
What else? What are some more thoughts on early stage SaaS startups still raising money at huge multiples?
David Cummings on Startups 
The biggest issue is making sure they raise enough to get over the next bar.
At A, $60m is less the true value and more the value bar you need to jump to get future funding.
And – they need to raise enough to become credibly or actually cash flow neutral and can hunker down if the market shifts or they have challenges.