Prepared by our partners Finance PM Team
An essential exercise every founder shall perform before starting fundraising is valuing their company. Why is it important? In short, to understand how many shares to give away to investors in return for their money. I tend to agree that business valuation is more art than science. Every company is unique; hence there are many factors to be taken into consideration. And in the end, it all comes to negotiating, being able to sell your vision, and development strategy at the highest price.
Nonetheless, there are specific valuation methods for different types of companies, and today I would like to take a moment and discuss SaaS businesses. One of the key characteristics is that SaaS companies are usually valued based on their MRR, so forget about setup fees or other complementaries to your revenue. That’s the reason I advise using several approaches and come with an average.
Below I will share the most commonly used techniques and provide some comments.
Quantifying the SaaS Valuation Growth Rate Multiplier
Valuation = ARR * (3+(GRM * GR))
ARR: Annual Recurring Revenue
GRM = Growth Rate Multiplier = 2.5
GR = Growth Rate
This one is all about the growth rate and how it’s crucial for deciding how much SaaS business is worth.
Revenue growth multiple five years
Valuation = Revenue * expected 5 year revenue growth (incl. discount)
Here the value of the company is equal to the expected growth over five years.
80x – 110x MRR (Monthly Recurring Revenue)
Valuation range = 80-110x * MRR
This one is not intended to be strictly accurate or reliable for every situation and is rather a principle with broad application.
Based on a multiple of the company’s annualized revenue.
Annualized Revenue x Multiple = Company Valuation
For private SaaS businesses, the net present value of future cash flows can be reduced to a shorthand formula based on a multiple of the company’s annualized revenue.
In this case, you account for the following company-specific drivers of financial valuation:
growth and scale of revenue
gross margin & revenue mix
customer acquisition efficiency and unit economics
ARRG = 6,7
Multiplier = 6,7 * ARR growth rate
Valuation = ARR * multiplier
Using the median value of ARRG that equals 6.7 as a multiplier and growth rate of the business.
Price Earnings Ratio
Valuation = Net income * 10
A generic approach that might be applied along with more specific methods.
Indeed, this is only a glimpse, and we will dedicate some more materials to this complex yet very fascinating topic. Check out our blog and remember we can always help you with your business valuation.
Finance PM Team