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FINANCIAL TOOLS

B2B SaaS Valuation Multiples

B2B SaaS valuation multiples are financial tools that compare one financial metric against another in order to determine which companies are similar in terms of value and can be compared with each other.

Identifying SaaS company valuation multiples in particular can be a hot button topic, with many industry experts, investors, and founders disagreeing on the most appropriate method of selecting ARR valuation multiples. There are many different factors that can influence SaaS startup valuation multiples. The annual recurring revenue, or ARR, of a SaaS startup is one of the most vital metrics that organizations can look at when trying to identify valuation multiples. Depending on what valuation calculator is being used, ARR may or may not be part of the equation explicitly. ARR shows how much recurring revenue a SaaS company can expect to generate every year depending on its current subscriber base.

SAAS STARTUP
VENTURE CAPITAL
ANNUAL RECURRING REVENUE
INVESTORS
REVENUE
ARR
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B2B software companies served... and counting

B2B SaaS valuation

Another commonly used metric in B2B SaaS valuation multiples is a growth rate. 

Growth rate is hugely important to SaaS companies of all sizes when determining value. However, growth is most appropriately compared to the growth of businesses of a similar size. Comparing the growth rate of a small business to that of a SaaS unicorn would not be appropriate, because too much differentiates the companies. Two more SaaS valuation metrics that are commonly used are net revenue retention and gross margin. Net revenue retention is the value that shows how revenue would change if the number of new sales did not increase. If the value of customers that upgrade their subscription makes up for the number of customers that downgrade or churn, the product basically sells itself. While it’s extremely rare for a SaaS company to have that kind of NRR, this metric can be used to indicate the quality of the company’s product and positioning.

valuation formula

While gross margin isn’t always used in the formula for valuation directly, it is associated with valuation because it can reveal how much revenue could be used to fuel growth or provide returns to investors.

B2B SaaS valuation multiples are often used or calculated when a company is about to be sold or invested in. Every stakeholder has a vested interest in calculating the value of the company in a way that is most favorable for their circumstances.

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SaaS Companies

Saas Valuation Calculator

There are a few different startup valuation calculators that are popular in the industry. Many experts recommend that SaaS companies be valued differently depending on their size, age, and growth rates. SDE, or Seller’s Discretionary Earnings, is one SaaS valuation calculator that many like to use. SDE is a value that captures the revenue-generating capacity of a business after subtracting the cost of discretionary expenses. SDE is typically used for smaller businesses that are currently valued at under five million dollars. This is especially true if the business has a slower growth rate or does not have a management team in place. SDE is used for smaller businesses and can be used to identify how much money-generation power the business truly has.

SDE 
SaaS companies
SAAS VALUATION  CALCULATOR

Commonly Used Valuation Calculator

EBITDA is another commonly used valuation calculator. EBITDA, (an acronym for earnings before interest, taxes, depreciation, and amortization) is used primarily in larger businesses with current values of over five million dollars. When looking at a company’s earnings before interest, taxes, depreciation, and amortization, the goal is similar to that of SDE – to identify the money-generating power of the business. One of the primary differences between SDE and EBITDA, however, is that there are more staff costs, owner compensation, and discretionary costs to factor in with EBITDA. Only after those expenses have been included will the value be closer to truth in terms of true revenue generation. EBITDA is not commonly used as a SaaS company valuation calculator because it is not always a true indicator of potential future earnings.

EBITDA
EARLY STAGE
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SERIES A INVESTMENT

Valuation Calculators

There really isn’t a secret formula or always-correct calculator that can determine the actual value or potential value of a company based on numbers as they currently stand.

Series A valuation calculators

Are based on a number of different factors, such as proven track record, current business management, market size, and risk. While there are commonly scrutinized metrics or indicators of business performance, crunching the numbers will only give most investors a general idea – the value either results in a risk that they feel comfortable taking or one that they do not. Instead of looking for a perfect calculator and settling on one number, it is recommended that businesses identify a valuation range. Especially in Series A investment, there’s usually a compromise to be made between how much capital a company needs and how much equity a startup is willing to give in return.

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Entrepreneurs
Series A

Typical Series A Valuation

SaaS capital valuations are done before the beginning of a round of funding. SaaS capital valuations can help determine when a company will be ready for funding rounds and provide a general projection of a company’s value overall.

Series A funding

Happens after seed investment, which is the very first type of round for a startup. Series A investors are typically from traditional venture capital firms, unlike Angel investors. While Angel investors can still choose to invest in a Series A round, they are likely to have less influence than they would have in a seed funding round.

Typical series valuations

Are based on a few different things such as growth, risk, the product or company’s impact in the market, and intellectual property owned. There isn’t a magic secret to SaaS Series A valuations that is the key to determining the best value or gaining the most funding. Many investors will calculate based on factors that are most important or most meaningful to them, which can vary from investor to investor.

Many early-stage SaaS valuation multiples

Are impacted by over a dozen factors related to the business overall. Factors can include a wide variety of business aspects, such as financial management, customer relationships, operational management, and more. However, the three biggest influencers of the multiple are the sustainability, scalability, and transferability of the business. Transferability refers to the ease or simplicity of changing ownership of the business. Not every founder wants to stick around forever, and as is usual with venture capitalists, there is equity to be taken stock of and distributed. Companies that are easier to transfer may have a higher valuation due to the lack of headaches incurred in the process of transitioning.

SaaS companies can be difficult to value based on popular models. Many SaaS companies have something of an unpredictable nature, which could suddenly gain or lose value quickly – think of video conferencing software before the pandemic. While it certainly had its use, Zoom was not a common household name before COVID-19. The pandemic has had a huge impact on the way the world works and behaves at work. Video conferencing is a part of life for many now, which would impact a company’s valuation on Zoom tremendously. There are many variables that come into play when attempting to value a SaaS company, such as age of the business, owner involvement, growth trends, client/customer churn, and funding status.

SAAS VALUATION

Rule Of 40 Saas Valuation

The rule of 40 is a way to indicate the balance between profitability and growth. The rule of 40 can be used as a benchmark to identify the health of a startup. For the rule of 40 SaaS valuation, a company needs to have a combined growth rate and profit margin of over 40% to be considered a ‘safe’ investment. For example, if a company’s revenue growth is 30% and their profit margin is 15%, the SaaS valuation formula value for the rule of 40 is 45%. At this valuation, this company would be seen as a value proposition for investors.

The rule of 40 is specific to the SaaS industry and is not applicable to companies in other industries. Companies in the SaaS sector tend to maintain high margins of 70-90%, with 40% being the bare minimum value for sustainable growth. The rule of 40 is meant to serve as a benchmark to identify or compare companies that might operate in different structures or are in different phases of the business cycle.

The rule of 40 is calculated using revenue growth and profitability, which are two aspects that any SaaS business should already be identifying in their own company yearly, if not monthly. Revenue growth is a standard value, and knowing it is necessary for companies to continue operations. Revenue is also a standardized concept – there are clear definitions for what constitutes revenue. Profitability, however, is a somewhat subjective term that could potentially be applied to several items on an accounting ledger. A common indicator of profitability is a company’s earnings before interests, taxes, debt, and appreciation. That’s right, good old EBITDA.

Calculating the rule of 40 can offer investors and leaders a guide to what compromises or trades a SaaS company can undertake. It can also help leaders identify their ability to invest without sacrificing their profit margins. However, the most common reason that the rule of 40 is calculated is so that investors can compare SaaS investment opportunities to each other. Venture capitalists can use the rule of 40 to compare SaaS companies to each other regardless of how or where those companies are in their business processes.

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Capital Efficiency

Saas Capital Benchmarks

There are many popular benchmarks in SaaS. However, it’s important for each company to decide what it is important to them and necessary for their business model to succeed. The rule of 40 is one of the common SaaS capital benchmarks that founders and investors alike use to determine investment quality and the overall value of business. The SaaS multiple index for 2022 can vary wildly, but for businesses valued over two million, a typical multiple might be between 7x and 10x. However, as we’ve learned, there are many factors that go into the valuation. Each business is unique, and every model places emphasis on a different set of metrics.

The SaaS multiple index is a way of tracking common multiples for the SaaS industries in the years past. It may also provide an indication of the types of multiples to expect for an industry in the coming year. In investing, an index tracks the performance of a group of assets, such as publicly traded companies and their stock prices. Examining the index of publicly traded SaaS companies may give privately owned SaaS startups a way to gauge their own valuation. Investors primarily use indexes as a way to compare the performance of a company against another company or against the general market.

Another popular example of a SaaS benchmark is the revenue growth rate, which we’ve discussed briefly. While it is a popular benchmark, it’s not altogether useful removed from the context of its company and their other benchmarks or metrics. For example, if costs are rapidly increasing and outpacing the revenue growth rate, then the business is actually losing money and becoming less profitable. The average revenue per user ARPU is another common metric or benchmark in the SaaS industry. ARPU determines how much revenue each subscriber is generating over a given amount of time. The ARPU can also be a helpful figure when trying to determine the Customer Acquisition Cost or CAC. The CAC should not exceed the ARPU, or profitability can decrease.

SaaS Benchmarks
The SaaS Multiple Index
SaaS Startups

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