With ServiceMax’s great exit to GE, it’s clear that SaaS valuations for high growth market leaders continue to be strong. When thinking about SaaS valuations, here are three quick ideas to keep in mind:
- Rule of 40% – Growth plus profitability should be 40% or greater. Meaning, if the company isn’t profitable, it should be growing revenue at a rate of 40% or higher. If the company has 20% profit margins, it should be growing at least 20%. If no growth, it should have 40% profit margins.
- Growth Rate Multiplier – A simplistic formula to quantify how growth rate translates into valuations is as follows: (2 * Annual Recurring Revenue) + (Annual Recurring Revenue * (1 + (2.5 * Growth Rate))). A no growth SaaS company would be 3x ARR. A $1M ARR company with a 200% growth rate would be $8M (hot startups command much higher multiples).
- Type of Equity – Not all equity is the same. As an example, equity with cumulative dividends and participating preferred rights makes the effective valuation much lower than the stated valuation. When reading about valuations online, know that different terms can make for different valuations.
A variety of factors contribute to valuation with growth rate and scale being two of the biggest drivers.
What else? What are some other ideas when thinking about SaaS valuations?
David Cummings on Startups 