Hi, I’m Chris Walton, author of this guide and CEO of Eton Venture Services.
I’ve spent much of my career working as a corporate transactional lawyer at Gunderson Dettmer, becoming an expert in tax law & venture financing. Since starting Eton, I’ve completed thousands of business valuations for companies of all sizes.
Read my full bio here.
If you’re raising funds for your SaaS company, it’s important to understand how investors determine the value of a SaaS business to decide if it’s worth investing in.
This helps you negotiate confidently, raise the right amount of capital, and plan ahead to maximize your company value.
From my 20 years of experience valuing hundreds of startups (including SaaS) alongside VCs, I know that this valuation process is intricate and nuanced.
As a SaaS founder, you might have questions like:
In this article, I’m going to answer these questions with insights, quotes, and tips from actual VCs and SaaS startup advisors. Here’s what you can expect to learn:
Valuing a SaaS company is not as straightforward as valuing a publicly traded company, and traditional valuation methods rarely apply to SaaS.
This is largely due to these reasons:
This makes it harder for both SaaS founders and investors to come to an accurate, unbiased value.
“Valuations are always a tricky exercise, even more so at seed stage when startups are pre-revenue or with very little revenue,” says Alice Besomi, VP of Investments at Jungle Ventures.
In fact, venture capitalists like Besomi would say SaaS valuation is both an art and a science.
It’s not just about hard-and-dry calculations or numbers, but it’s also about the potential of your product, the expertise of your team, and most importantly, negotiations between you and the investors.
This means that most traditional valuation methods that focus only on calculations do not work for SaaS companies and startups. These include:
“Investors just don’t care about any of these methodologies,” says Brett Fox, Startup CEO Coach who has raised over $100 million in Venture Capital & Private Equity Funding.
To see if a valuation method will hold up with investors, he advises to ask yourself a question that they would ask: “Does this method matter to me as an investor?”
And the only method both Besomi and Fox say works for SaaS is the comparable transactions method.
So, what is this and how do you calculate it?
📖 Related Read: Venture Capital Valuation: 7 VC Valuation Methods & the Process
In the Comparable Transaction Method, you research and find out what similar companies have recently been valued at, Fox explains.
This method works because investors also research how much similar startups are valued at. So, essentially, you and the investor would be coming to a similar value.
Here is a step-by-step guide on how to value SaaS companies using this method:
To identify comparable companies, look at “a basket of public companies or private companies with disclosed revenue and valuation”, says Besomi.
This means you’ll need to research SaaS companies that are closely related to you in terms of the market, product, or company stage.
Once you’ve identified comparable companies, the next step is to find out at which multiples these companies were valued at.
Multiples are valuation ratios used to estimate how much a company is worth based on a specific financial metric.
They tell you how much investors are willing to pay for each dollar of revenue or earnings a company makes.
For example, if a comparable SaaS company has a revenue multiple of 5x, it means investors paid five times the company’s annual revenue to buy it. And this also means your SaaS company *could* be valued at a multiple of 5x.
Let’s look at two key kinds of multiples in detail:
Revenue multiples (Enterprise value/revenue) is used when a company has strong revenue growth but may not yet be profitable.
This is particularly common in high-growth industries like SaaS, where recurring revenue is a key value driver.
Besomi shares: “For early stage startups, you typically look at multiples of enterprise value to revenue, and in the SaaS context, we take your annual recurring revenue as a proxy.”
But as a SaaS startup, you might have multiple revenue streams like one-time consulting fees or hardware sales. These have varying margins and are not recurring. Do you apply the multiple to this type of revenue?
Besomi advices this:
“If you are able to add layers of extra revenue on top of the SaaS ones, then of course, that would bring additional value,” she adds.
So the formula for the total valuation becomes:
Total Valuation = (SaaS Multiple × Recurring Revenue) + ∑ (Non-SaaS Multiple × Non-Recurring Revenue)
So which multiples should you apply to your revenue?
Kibi.One shares typical revenue multiples used to value SaaS startups based on the annual recurring revenue (ARR).
ARR Range | ARR Multiple Range |
Less than $1 million | 1x to 3x |
$1 million to $10 million | 2x to 4x |
More than $10 million | 6x to 10x |
Now amongst the range, which multiple will be used depends on many different factors, which we will discuss in a later section.
More mature SaaS companies use EBITDA Multiples rather than just revenue because it gives a clearer picture of the company’s actual earnings.
Since mature companies have multiple employees and managers, and are usually run by a CEO rather than the owners directly, EBITDA helps show how much money the company really makes after paying for necessary expenses like salaries and equipment, explains FE International.
It adds back in any payments to owners and any extra spending that isn’t needed for the company to run day-to-day.
To find your EBITDA, here’s a formula you can use:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Once you have found your EBITDA, you want to know what multiples other companies within the EBITDA range are being valued for.
Below is a chart of SaaS EBITDA multiples in 2024 for the private sector.
For instance, if your EBITDA falls into the $3-5M range, and you’re an AdTech company, other companies like yours were valued at 10.5x multiple.
Source: First Page Sage
Now that you have the actual multiples from various comparable companies, calculate the median of these multiples to determine your company’s multiple value.
Let’s say you’re evaluating the value of your tech startup and you look at the enterprise value to revenue multiples of similar companies:
To find the median multiple, arrange these values in order: 4x, 5x, 6x, 7x, 8x. The median value, which is the middle number in this list, is 6x.
Therefore, a reasonable multiple to use for valuing your company might be 6x revenue.
Now that you have determined the multiple, apply it to your company.
Assumption: The median revenue multiple for similar small SaaS startups in fintech is 4x.
Target Company Revenue: $2 million.
Calculation:
Company Valuation = Revenue × Revenue Multiple
Company Valuation = $2million × 4 = $8million
Assumption: The median EBITDA multiple for similar companies is 6x.
Target Company EBITDA: $500,000.
Calculation:
Company Valuation = EBITDA × EBITDA Multiple
Company Valuation = $500,000 × 6 = $3 million
🤔Want tailored advice for your SaaS valuation? 🤔
This article is great for general guidance on the SaaS valuation process but unfortunately, it can’t be tailored to your unique circumstances. And when it comes to valuation, circumstance determines everything.
If you want personalized advice to help you navigate your SaaS valuation, get in touch with us here. We can provide advice specific to you over a call.
Otherwise, please read on for 7 key metrics that influence your valuation and expert tips.
As I’ve said before, the SaaS valuation process is very qualitative and nuanced, and there are multiple metrics that influence how much your company is worth.
Let’s look at each of them and how to maximize your company value.
One important factor that impacts valuations is the size of the market you sell to. This is called the Total Addressable Market (TAM).
If you have a larger TAM, your business can be worth more.
To increase your market size, see if you can serve additional industries.
For instance, a software originally designed for retail inventory management could be adapted to also manage inventory for hospitality businesses, broadening its market reach.
Similar to TAM, the sector is directly related to valuation.
The stronger the sector, the higher the valuation.
A strong sector means it’s growing fast and has a lot of potential for more growth.
You can maximize the value by focusing on multiple sectors, like “SaaS + fintech, where in addition to the core software, you are reselling or embedding financial products or services like payment, insurance, lending, payroll, etc,” explains Besomi.
“IP” means intellectual property, which includes patents, trademarks, copyrights, and trade secrets.
IP increases the business value because it protects the product’s special features from being copied by competition.
Secure IP in early stages of your business development, advises Thomas Smale at FE International.
In case it is not done earlier, you can do it ahead of the sale at the United States Patent and Trademark Office.
However, securing IP goes beyond just filing for trademarks, Smale writes.
Anyone who helped write code or develop the product, especially contractors from freelancing sites, should sign a document claiming their work belongs to the company.
Similar to IP, year-over-year growth rate is also directly related to valuation.
The faster your growth rate, the higher your valuation tends to be.
“To get a higher multiple, your company must be growing faster than other similarly sized SaaS companies.
It’s easier to grow quickly when a company is small, and so the growth premium varies by company size,” explains SaaStr.
For example, a SaaS company growing twice the average rate might see its valuation multiple increase by 50%.
To increase your year-over-year (YoY) growth rate, consider these strategies:
Churn rate, which shows how often customers leave, is another important metric because “it touches upon all the key factors that impact the perceived future cash flows of a SaaS business,” writes FE International.
Churn rate is inversely related to valuation.
The lower the churn rate, the higher the business value.
When a business keeps its churn rate low, it means customers are happy and stay longer, which makes the business more valuable.
If the churn rate is high, it suggests problems like the product not meeting customer needs or strong competition.
The churn rate significantly affects a business’s long-term health.
For example, companies with a 5% and 20% annual churn will see vastly different revenues after ten years.
Check out this graph from FE International for a clearer picture of how churn impacts financial outcomes.
Here is average churn rate of different SaaS businesses from a small sample set:
To minimize the churn rate, focus on improving customer retention:
Apart from minimizing churn as much as possible, Smale also emphasizes focusing on customer acquisition to replace those customers who do churn.
Customer Lifetime Value (LTV) represents the total revenue a business can expect from a customer over the duration of their relationship.
A higher LTV shows that each new customer brings more value to the company.
LTV varies based on the business model, market conditions, competitive landscape, and other variables.
To increase LTV in your business, focus on improving customer satisfaction and retention. Here are a few strategies:
The better your team is, the higher the valuation tends to be.
“Businesses that require relatively little time and have a team in place are more attractive than those that require a lot of owner work,” writes Smale.
Having a better team means your team members are skilled, experienced, and work well together.
VCs typically assess the strength of a team by looking at their backgrounds, experiences, and previous successes.
They often evaluate the team’s expertise in relevant sectors, their ability to innovate and execute, and how well they work together.
To maximize these values, invest in training and professional development for your team to enhance their skills and cohesion.
Similarly, stronger tech leads to higher valuations.
Strong tech refers to having advanced, reliable, and effective technology.
For gauging the value of technology, VCs consider:
For your technology, hire talented developers and continually innovate and update your systems to stay ahead of the competition.
As a SaaS startup founder in 2024, staying ahead of industry trends is essential, and understanding the impact of AI on startup valuations is a critical part of this.
Here are three key ways AI is impacting and expected to impact SaaS startup valuations in the coming years:
Still in its infancy but AI is already profoundly impacting the valuation of SaaS startups.
SaaS funding for years has been governed by the Rule of 40, which states that the combined sum of revenue growth rate and profit margin should be at least 40%.
But now, according to a latest analysis, the new standard is going to be the Rule of 55 instead.
This increased expectation from SaaS companies is due to GenAI’s ability to escalate productivity, growth, and improve operational efficiency.
This has a positive impact on everything from revenue, gross margin, R&D, sales, marketing, and admin.
“Consolidating GenAI’s impact… we project a +15% gain for SaaS companies, with roughly 2% arising from additional growth and + 13% of EBITDA improvement,” writes Raphaelle d’Ornano, Founder and Managing Partner at the firm D’Ornano. + Co. that did the analysis.
The impact of AI on valuation is also evident in how highly AI SaaS startups are being valued at.
According to a study, revenue multiples for AI-focused SaaS startups are currently at an impressive 37.5x, much higher than the average SaaS multiple of about 7.6x
This stark difference shows that investors have very high expectations from AI-driven SaaS companies, which can help you get a higher value.
AGI, or Artificial General Intelligence, represents a hypothetical next step in AI development.
It is envisioned as AI capable of performing any intellectual task that a human can do.
Tech trader and entrepreneur John Hwang explains that AGI could allow a non-technical person to replicate complex applications like Airtable in just 20 minutes.
This would simplify software development and reduce the need for complex software solutions, lowering the value of software companies.
This is especially true for those in project management and CRUD (Create, Read, Update, Delete) sectors, such as Airtable, ClickUp, Asana, and Monday.com.
Hwang concludes by warning, “Basically, every SaaS company that facilitates knowledge work is in danger… Of course, new workflows may spring out after AGI, but those will probably not be knowledge-based but human service based, and not facilitated by software.”
This shows that even though AI is currently increasing the value of startups, it could harm some parts of the SaaS industry if AGI, which would be much more advanced than AI models we have today like GPT-4, changes things significantly.
Now that you understand how to value your startup and how AI might be impacting your valuation, let’s look at how to prepare for the actual meeting.
Securing investment for your startup depends not just on the numbers, it’s also about how well you present them.
Here are three key tips to help you do just that:
A pitch deck is one of the most important tools in capturing the interest of potential investors.
Fox suggests a smart approach: Integrate your business plan directly into your pitch deck.
And to keep it relevant, update it monthly.
Here is a free template from Fox which has all the slides you need to develop an awesome pitch deck.
When planning for investor meetings, it’s important to prepare for the “end game” questions, Besomi points out.
VCs often ask:
It is because your exit potential impacts whether they’re willing to invest in your company and how much they’re willing to pay.
Investors rarely rely on a founder’s own estimate of a company’s value.
So unless you are meeting with multiple investors at once, it is better to let the market, which is investors, decide the value of your company.
Let them make their first offer.
You can always counter the offer if needed.
Fox shares that having “competition for your deal where multiple investors are fighting to get in” can help you negotiate for more.
However, he stresses that it is very rare because it is a tough market with investors usually investing in only one of 100 companies they meet with.
In any case, “the highest valuation isn’t always the best option”, Besomi notes. it could be harder to sustain at the next round, especially if your industry only has a limited investor pool.
If investors ask you to go first, Fox suggests using Comparable Transaction Methodology.
Say, “I’ve seen companies like ours priced in the range of X to Y.”
As Todd Gardner, Founder and Managing Director of SaaS Capital, puts it: “Knowing where your business stands based on real-world data will give you an advantage in negotiating the best possible outcome for your company.”
This wisdom holds true no matter who makes the initial offer, underscoring the importance of being well-prepared with solid data.
This is also I always encourage SaaS founders to work with professional valuators who will give the most accurate and reliable valuation in a short period of time.
For instance, at my firm, Eton Venture Services, my team of Big-4 trained valuators and legal experts can deliver your SaaS valuation in 10 days or less, at a reasonable price.
Should you get into disputes, we also defend our valuations in court on your behalf.
This means you not only get an accurate valuation of what your SaaS company is worth, but you can also rest easy knowing we’ve got your back.
Just take a look at what our previous clients have said about Eton:
You can find more testimonials here. Or book a call with me and I’ll take you through our process and answer your questions.
Have more questions about SaaS valuations? I answered them below:
The average value of SaaS valuation can vary widely based on factors like growth rate, revenue, and market conditions.
According to data from Aventis Advisors, the median Revenue multiple for public market SaaS valuations at the end of February 2024 was 7.2x.
Throughout the years from 2015 to 2024, a median SaaS company was valued at around 5.0x revenue.
Here are the most common misconceptions and why they’re not always true:
Truth: While a high valuation can be attractive, especially for founders and existing shareholders, it’s not always the best indicator of long-term success.
Overly inflated valuations can lead to unrealistic expectations, difficulty in meeting investor demands, and potential challenges in future funding rounds.
A balanced valuation that reflects sustainable growth and profitability is more crucial for long-term company health.
Truth: While revenue multiples are important, they are not the sole determinant of a SaaS company’s value.
Factors such as profitability, growth rate, customer retention metrics (like churn rate), market size, competitive landscape, and team strength also play significant roles in valuation.
Investors look for a combination of these factors to assess the overall health and potential of a SaaS business.
Truth: Profitability is increasingly important in SaaS valuations, especially as companies mature.
While high growth rates are valued, sustainable profitability demonstrates the company’s ability to generate returns and manage expenses effectively.
Investors often look for a clear path to profitability or positive cash flow as a sign of stability and future growth potential.
Truth: Valuations involve both quantitative metrics (like multiples and financial ratios) and qualitative assessments (like market positioning, team expertise, and competitive advantage).
The perception of value can vary among investors based on their risk tolerance, strategic goals, market conditions, and the company’s growth stage.
Thus, valuations often involve negotiation and subjective judgments alongside objective financial analysis.
The rule of 40 is a metric used in the SaaS industry to evaluate the overall health and performance of a company.
It suggests that a SaaS company’s combined revenue growth rate and profit margin should equal or exceed 40%.
For example, if a company has a 20% profit margin, its revenue growth rate should be at least 20% to meet the rule of 40 criteria for healthy growth and profitability.
This metric helps investors, including venture capitalists (VCs), assess whether a SaaS company is efficiently balancing growth and profitability.
It is commonly used as a guideline during investment evaluations and can influence decisions regarding funding and valuations.
SaaS companies need different valuations for different stages of their growth. Here are the most common ones:
1. 409A Valuation:
A 409A valuation determines the fair market value of a company’s common stock for tax purposes, particularly regarding stock options and other equity compensation plans.
Why SaaS Companies Need It: Required by the IRS for private companies issuing stock options to employees. Ensures compliance with tax regulations and helps avoid penalties.
2. Venture Capital (VC) Valuation:
Venture capital valuation is where venture capitalists assess the worth of a SaaS company when seeking investment.
Why SaaS Companies Need It: Essential for fundraising purposes, determining equity dilution, and negotiating terms with investors.
3. Pre-Money and Post-Money Valuation:
Pre-money valuation is the company’s worth before new investment, while post-money valuation includes the new investment.
Why SaaS Companies Need It: Helps determine the percentage of equity offered to investors and the company’s overall valuation after fundraising rounds.
4. Mergers and Acquisitions (M&A) Valuation:
M&A valuation is important to determine a SaaS company’s worth in a potential merger or acquisition scenario.
Why SaaS Companies Need It: Guides negotiations, determines the sale price, and ensures shareholders receive fair value in transactions.
5. Exit Valuation:
Exit valuation is conducted when preparing for an exit strategy, such as an initial public offering (IPO) or acquisition.
Why SaaS Companies Need It: Helps determine the timing and terms of exit opportunities, maximizes shareholder value, and supports strategic decision-making.
Schedule a free consultation meeting to discuss your valuation needs.
Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.
🤔Want tailored advice for your startup valuation? 🤔
This article is great for general guidance on the startup valuation process but unfortunately, it can’t be tailored to your unique circumstances. And when it comes to valuation, circumstance determines everything.
If you want personalized advice to help you navigate your startup valuation, get in touch with us here. We can provide advice specific to you over a call.
