Recently an entrepreneur was asking about SaaS valuations for startups. Valuations, especially in startups, are often all over the place as there isn’t a liquid market and the value is generally whatever the most someone is willing to pay. With that said, here are three quick ways to gauge the value of a SaaS startup:
- 3 – 5x Annual Run Rate – Assume that the terminal valuation for a SaaS company is a multiple of cash flows, and that a true SaaS company can have 50% net margins if sales and marketing were significantly cut, resulting in this simple valuation range.
- 3 – 5x Annual Run Rate in 12 Months – For startups growing > 50% per year, there’s a big premium and the common way to do it is based on a multiple of the expected run rate 12 months from now (by being forward looking, it takes into account the growth rate).
- Typical Investor Check Size Times 4 – When raising a round, take the size of check the investor typically writes — say $3 million — and multiple it by four resulting in a post-money valuation of $12 million, reflecting the investor owning 25% of the business. Early institutional investors typically target an ownership of 20 – 30%, so that valuation is driven more so by the check size and target ownership rather than a multiple of run rate.
Valuations rarely go lower than this and sometimes go much higher for unique circumstances. Valuations, especially in startups, are much less scientific than it appears.
What else? What are some quick ways to value a SaaS startup?