Thinking EBITDA Multiples for SaaS at Scale

Last week I was talking to a growth stage software investor. We were discussing a recent round they lead and I asked how they thought about the revenue multiple for this SaaS business. Revenue multiple? I was quickly corrected that they didn’t underwrite it as a Rule of 40 multiple of recurring revenue, growth rate, and gross margin (see Rule of 40 Valuations). Rather, they made the investment based on an estimated EBITDA, and EBITDA multiple, five years from now.

Coming from the grow-at-all-costs for several years to the current grow-reasonably-efficient times, making the leap to EBITDA multiples isn’t as dramatic, but it’s still problematic with so many software companies burning cash. EBITDA (earnings before interest, taxes, depreciation, and amortization) is form of profitability calculation made popular by the Cable Cowboy John Malone many years ago. In rough numbers, a smaller business is worth 4-6x EBITDA, a mid-sized business is 6-8x EBITDA, and a large business or one with an exceptional business model is 10-15x+ EBITDA (also varies dramatically by industry, growth rate, etc.).

SaaS companies, due to characteristics like the stickiness of the product, high gross margins, revenue predictability, and more make for an exceptional business model. Let’s do some basic math to see how a growth stage investor might underwrite a SaaS company at scale to make 3-5x the investment in five years.

Initial Deal
$20M Revenue
$80M pre-money valuation
$20M investment for 20% ($100M post-money valuation)

End of Year 1
$27M Revenue

End of Year 2
$34M Revenue

End of Year 3
$41M Revenue

End of Year 4
$48M Revenue

End of Year 5
$55M Revenue

This is a fairly basic example with a static $7M revenue growth per year (meaning the growth rate slows each year with scale) and tremendous EBITDA growth in the later years due to economies of scale and a higher base of recurring revenue.

Here with a $50M revenue software business, $20M of EBITDA, and a 15x EBITDA multiple, you arrive at a valuation of $300M. A sale of $300M returns 3x the original investment, assuming no further dilution along the way, and the investors achieved their goal.

Theoretically, businesses should always have a floor valuation that’s based on the expected value of the future cash flows. For SaaS and other SaaS-like business models, this is a good exercise to think through potential valuations from a cash flow multiple perspective.

Value in a Large Trade Show

Last week I had the opportunity to walk the floor of a massive trade show for the first time since before the pandemic. There’s a real energy and buzz when hundreds of vendors mix with tens of thousands of attendees. The usual amalgamation of multi-story professional booths combined with homemade single-stall stations give it an air of upstarts and incumbents all vying for the time and attention of customers, potential customers, media, vendors, and partners. I imagine the first trade show was simply taking the format and style of a street market from thousands of years ago and organizing it for a specific industry. Humans proactively trading with each other is one of our biggest innovations as a species.

When I was growing up, my dad would go to a big trade show every summer for his industry and several times I was able to tag along. We went to places like Toronto, St. Louis, and Seattle for four or five days and did a mix of trade show and tourist activities. As a kid in middle school, I’d be on my own while he’d go to continuing education sessions. My favorite activity? Walking the trade show floor, of course, and collecting as many free goodies as I could. Pens and candies were my treasure. At the end of each day I’d show off my spoils and regale him with stories of cool products and booths. I distinctly remember sitting in a car on the show floor — a Lincoln Mark VIII coupe — and thinking how amazing it was to be in a fancy car with the latest high tech gadgets. Freedom to roam and trade show energy make for an incredible combination.

As an entrepreneur looking to break into a new industry, the first thing I’d do is find the biggest gathering, research the players, make a huge list of questions, and walk the trade show floor asking the best questions to anyone that’d listen. I’d go from booth to booth in the relevant areas and eavesdrop on conversations, observe which vendors have the biggest crowds, and seek out insights on the latest trends and growth areas. While not easy, the value and knowledge per hour spent should be as good as it gets.

Entrepreneurs should experience a large trade show at least once and learn how to get value from them.

SaaS Startup Growth Challenges

Almost four months ago I highlighted how the economic downturn was going to seriously hurt renewal rates for SaaS companies.

Unfortunately, it’s proving correct. Daily, big tech companies are announcing layoffs from to Google to Microsoft. While the big brands make the headlines, for every major company that announces layoffs, there are hundreds of startups doing the same thing.

Startups often sell to other startups and tech companies.

Startups and tech companies are early adopters. When they do layoffs, through no fault of the SaaS vendor, the number of seats and/or usage volume goes down. This hurts the renewal rates. Lower renewal rates make it harder to grow as there’s a mountain to climb just to get back to the same size as the previous year, let alone grow fast.

Startup valuations are heavily dependent on the growth rate, especially using the Rule of 40 methodology. With growth rate down due to higher churn from layoffs and fewer new customers due to the slowing economy, the Rule of 40 score goes way down. A lower Rule of 40 score makes for a much lower valuation come fundraising time, which increases the chance of a down round or no round. It’s a vicious cycle.

For entrepreneurs, it’s a real balancing act. Here’s an opportunity to keep pushing hard to build out the platform and gain marketshare while everyone else is challenged. Only, push too hard without enough progress and the chance of not being able to raise another round on favorable terms dramatically increases.

For many entrepreneurs, the solution is to push hard while attaining some form of default alive. Becoming profitable or breakeven, so as to be default alive, results in tremendous flexibility — there’s no ticking clock requiring another funding round. Even if it’s too dramatic to immediately get to default alive, another variation is to have a plan in place, often involving cutting costs and team members, to make the change, if things don’t progress the desired way. More flexibility also provides an invaluable benefit — helping entrepreneurs sleep better at night.

It’s a tough time in startup land. For the entrepreneurs that can make it through the next 12-24 months in a position of strength, renewal rate improvements and stronger new customer growth will be the reward.

Startup Valuations as Rule of 40 and Market Sentiment Multiples

One of the hottest topics lately is valuations. With the public equities down dramatically over the last year and most startups deferring as long as possible to raise another round, it’s hard to know what’s market out there. Of course, some deals are getting done and the startup funding world is still turning, albeit at a slower, more jerky pace. 

On the public market front, the BVP Cloud Index shows cloud stocks trading at an average revenue multiple of 6.3x with an average growth rate of 29%. The median forward revenue multiple is 4.82x (using the expected revenue for the next twelve months). At the peak of the market on February 10, 2021, the median forward revenue multiple was 15.95x. Thus, we’ve seen a 70% drop in valuations.

On the private market front, I’ve heard of deals all over the place from 2x to 10x+ revenue run rate, often driven by how desperate the startup is to raise money to how desperate an investor is to put money into a startup. The days of 50x or 100x run rate valuations are long gone (ignoring outliers like Figma or OpenAI). 

So, what’s a generic valuation formula in today’s market? Absent more data, here’s a formula to ballpark a number:

Revenue Run Rate (most commonly annual recurring revenue)

Multiplied by

Rule of 40 Score

Multiplied by

.2 (market sentiment, in this case 20%)

Some examples:

  • $20M ARR x 50 Rule of 40 Score x .2 = $200M
    Because of the high Rule of 40 Score, the startup gets a valuation of 10x run rate
  • $10M ARR x 20 Rule of 40 Score x .2 = $40M
    Because of the normal Rule of 40 Score, the startup gets a valuation of 4x run rate
  • $5M ARR x 10 Rule of 40 Score x .2 = $10M
    Because of the low Rule of 40 Score, the startup gets a valuation of 2x run rate

Rule of 40 Score is basically growth rate plus profit margin as numeric values. The easiest way to get profit margin up (or less negative) is through layoffs, and we’ve seen huge numbers of them lately.

Much like “animal spirits” from John Maynard Keynes, market sentiment here is subjectively and fluctuates regularly. While this formula isn’t perfect, it’s directionally useful in today’s market.

Tie Value to the User Like Instacart

Last week I was placing a grocery order on Instacart and I noticed the following message after the checkout process:

You saved with Instacart 

565 hours

The “565 hours” is displayed bright and large to really stands out. It’s big, bold, and impactful. I know there’s a convenience and time saving element to the Instacart value proposition, only this makes it front and center as a regular reminder. 

Now, how does Instacart calculate this number? Is it an arbitrary allocation of one hour per order (thus, I’ve made 565 orders over the many years of usage)? Or, is there a slightly more involved calculation that incorporates the number of items ordered and assigns a value of time to each? Regardless, I do believe I’ve saved hundreds of hours of time over the years using Instacart, and for that I’m thankful.

Seeing this made me think of other ways products and services need to tie value back to the user, especially in the B2B context.

Some common ones:

  • Return on investment
  • Increase in XYZ metric (revenue, profitability, NPS, etc.)
  • Decrease in XYZ metric (days sales outstanding, average response time, bounced emails, etc.)

Ideally, this is automated and prominent in the application. By using the product, the value is clear. Sometimes it’s more difficult to calculate and requires a person to do a quarterly business review where you meet with a customer to walk through how you’re contributing to their success. A word of warning: if you can’t clearly articulate the customer’s success, the solution isn’t likely to achieve large scale success.

The next time you use a product, figure out how it expresses value. Is it obvious or is it nearly hidden/non existent? The best products provide both tremendous value and make it easy to see the value.

Simple Strategic Plan for 2023

With 2023 almost here, I was thinking about advice for entrepreneurs in the new year. It’s a tough time right now as the economy and most companies are in a defensive posture — many negative economic factors are still pulsing through the system. No matter the situation, I keep coming back to the most important general purpose tool entrepreneurs should use: a simple strategic plan.

The simple strategic plan, just like it sounds, is a high level overview of the business and the critical elements of the company. The goal isn’t to be the a comprehensive, detailed write-up of all aspects of the enterprise. Rather, the goal is to get everyone inside and outside the company on the same page with as much clarity and concision as possible. Put another way, if you could only use 250 words to tell someone about the business, this is the best formula to do so.

Now, here’s the outline of the simple strategic plan:


  • One line purpose

Core Values

  • General – fit on one line
  • People – fit on one line


  • One line description of your market

Brand Promise

  • One line brand promise

Elevator Pitch

  • No more than three sentences for the elevator pitch

3 Year Target

  • One line with the numeric target, often the most important KPI

Annual Goals

  • 3-5 annual quantitative SMART goals in table format with the start value, current value, and target value

Quarterly Goals

  • 3-5 quarterly quantitative SMART goals in table format with the start value, current value, and target value

Quarterly Priority Projects

  • Three one-line priority projects with the percent complete for each

Simple strategic plans are most effective when managed in a Google Doc, Notion Doc, or similar collaborative system. The plan should be widely shared, updated regularly, and talked about frequently. As a living, breathing document, it represents the foundation of the company whereby everyone is aligned and organized.

If you make one action item for the new year, make it to build and maintain a simple strategic plan. Good luck in 2023!

Misguided Product Features

In the early days of Pardot we were cranking out features left and right. With no technical debt, a rapid development environment (PHP on Symfony), and a race for product/market things were moving fast. Super fast. Only, with speed and little to no input from customers, it was too easy to build features that didn’t make sense. How about building X? Sure! How about building Y? Go for it.

Naturally, with hindsight, we built modules that shouldn’t have been built. One such module we built was called Site Search. At the time, products like Algolia didn’t exist and it was a pain to add an internal search engine to a website. For Pardot, the goal wasn’t the actual site search functionality. Rather, it was to capture the search terms from the site visitors and prospects — intent. This intent could then be scored, tied to automation rules, and placed in the CRM. Imagine searching for “pricing” on a website as a known prospect and an email gets triggered automatically from your assigned account executive in the CRM with detailed pricing information. Pardot automated that whole process.

To make this module work, we had to build the site crawlers, background jobs to regularly re-index the sites, and all the other infrastructure. It wasn’t the best use of time. Rather, we should have made it easy to tie into other search products, even if they were scarce, such that when a search was done on an external system a Javascript call-back function would send the search term to Pardot. Pardot was a marketing automation platform, not a site search platform.

The next time an idea for a module comes up, think through how well it fits the overall mission and vision of the product. Does it make sense as a native feature or as an integration to a best-of-breed product? Will a material percentage of customers now and in the future use it? What’s the priority of this feature relative to other items in the queue?

Misguided product features are more common than expected. Work hard in the product planning process to minimize them, and if they get built, stay vigilant to remove them if it’s clear it wasn’t the right direction.

Output vs. Outcomes for Startups

In the early days of Pardot, the idea of sales or business development reps for SaaS companies started to gain popularity. While not a new concept, the idea of cold calling and cold emailing potential prospects was thought to be old fashioned and not effective. It was wildly effective. As part of building the process around outbound sales activities, we also learned an important lesson in output vs. outcomes.

Initially, we focused on output. Every rep had to make 40 calls and send 40 emails per day with a quota of one scheduled demo a week. Reps received a base salary plus $100 per demo. Eighty calls and emails per day, when done diligently with high quality talking points and content, should result in scheduled demos. The output of the calls and emails was scheduled demos.

Only, after a number of scheduled demos, and paying out the commissions, we realized output and outcome are two different things. The reps were scheduling product demos with anyone that would take a demo, regardless of fit. If someone on the other end of the line said ‘yes’ to a meeting, the rep scheduled that meeting. 

Our desired outcome was a completed demo with a potential prospect that was a good fit. So, instead of $100 per demo scheduled, we changed it to $200 per demo completed (not just scheduled) where an account executive accepted the meeting and the potential prospect showed up for the call. Now, not only did the meeting have to be scheduled, the potential prospect be the right type, but the meeting had to take place (lots of no-shows in sales prospecting). We moved the outcome from being worthwhile on occasion, to a well-defined outcome that was useful most of the time.

Output is what happens as a result of effort.

Outcome is the value from the output.

As an entrepreneur, it’s easy to get too focused on output and not provide enough attention to outcome. Both are needed and both are critical to growing a startup. The next time you’re thinking through activities and effort, breakout the output and outcome elements and ensure they’re aligned properly.

Entrepreneur as Editor and Curator of Ideas

Last week I was talking to a well known entrepreneur about his journey. After several background questions I asked how his role has changed going from solo founder to leader of a company with nearly 1,000 employees. His answer:

Before, I was ideator and doer. Now, I’m the editor and curator of ideas.

An editor and curator of ideas. Of course, that makes perfect sense. Only, I hadn’t heard it presented that way. In the past, I’ve heard the entrepreneur’s three jobs presented as the following:

  • Set a mission and vision
  • Find and nurture the best people
  • Ensure there’s enough cash in the bank

While I believe those three to still be true, a fast growing business that’s transitioned from startup to scaleup needs a strong editor and curator. More scale results in more competing interests and complexity. More scale results in more initiatives and more opportunities. Scaleups, even with an incredibly successful core business, can easily lose their way chasing The Next Big Thing. Saying “no” becomes even more important than saying “yes.”

As an entrepreneur, the next time 10 ideas are thrown at you, imagine yourself as the editor of a well regarded magazine. What articles do you let in? What does your readership expect? What’s the tone you want to set? Where are you heading? Put on your editor hat and evaluate the ideas in the context of the overall mission and vision.

Entrepreneurs should be the editor and curator of ideas for their business.

If You Don’t Ask, You Don’t Get

Last week entrepreneurs reminded me several times of one of my favorite adages: if you don’t ask, you don’t get. While it seems obvious, the reality is most people assume if something isn’t offered up or available, then you can’t get it. We’re conditioned to assess what’s in front of us, what’s obvious. Only, pushing beyond the perceived limits is what moves the world forward.

One entrepreneur shared how he really wanted to ask a well known business person for advice. Everyone told him it was a waste of time — he’d never get to the person. After trying the networking route with no luck, the entrepreneur made the ask in a cold email. Yes, a cold email. Unexpectedly, the business person promptly responded, they connected on the phone, and hit it off.

If you don’t ask, you don’t get.

One entrepreneur shared how he really liked this adjacent business where the owner claimed they’d never sell. The entrepreneur put an annual reminder on his calendar — December 1st — and every year he’d check in. Like clockwork, he was persistent. 10 years later the owner decided it was time to sell. You know who bought the business? The entrepreneur that stayed pleasantly persistent for a decade.

If you don’t ask, you don’t get.

One entrepreneur shared how he really loved this house he’d drive by on the way to the office everyday. Randomly, a for sale sign appeared one day and he promptly called. The house was already under contract, that same day. Bummed, he let it go. Only, no one moved in and the grounds became unkept. Realizing something was up, he contacted the new owner, who had since changed his mind, and promptly bought the house from him.

If you don’t ask, you don’t get.

Making the ask starts out uncomfortable, unnatural even. With effort and practice, it becomes easier and easier. Start now and always remember: if you don’t ask, you don’t get.