Keeping it SaaS-y: Valuations for SaaS Companies

We’re into August, which means savvy entrepreneurs are thinking about the fall… and Funding. If you’re working on a cool new Software-as-a-Service (SaaS) product, it’s a pretty special time to raise money. Check out the latest Valuations data from the folks at PWC (https://www.pwcmoneytree.com/MTP…).Bottom-line: software funding grew 36% to $1.6B in Q1 2012 vs. Q1 2011, while most other sectors shrunk.  Go get yours.

But how should you think about valuation? What is “market” for high growth SaaS companies?

Well, here’s one way to think about it:

SaaS Valuations Grouped by Growth Rate & Margin

In short, high growth (30% per year or more) and high margin (65% or more) businesses trade at a big premium. How much of a premium? 7 times your NTM (next 12 months) sales, vs. 4-5 times NTM sales for “regular” SaaS businesses.

Your business (and founder shares) could be worth 40-75% more if you are in that top right category.

Duh right?!? But it raises an important question every founder should care about – how do I get there and what are the signposts?

Some “SaaScid Tests” to live by:

All 3 tests relate to sustainable, high revenue growth:

  • If  LTV > 3X CAC, every dollar of sales & marketing spend builds  strong, sustainable revenue backlog, assuring future growth.
  • If months to recover CAC < 12, you  are capital efficient (less fundraising and dilution!) and can use your  own cashflows to fund your CAC
  • Low churn = higher starting point for next years revenue = higher growth rate

If you manage your pricing and your sales & marketing model to these benchmarks, you will enjoy strong profitability. And if you have profitability, you can pursue growth because the customer economics scale.

Oh, and if you’re hitting those benchmarks, we should talk!

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About Indy Guha

Indy is a partner at Bain Capital Ventures and co-founded their Bay Area office. He invests in early and growth stage Software-as-a-Service companies, with a focus on sales and marketing technologies. Current investments include 6Sense, Wrike, BloomReach, Optimizely, etc. He also leads BCV’s Pulse.Commerce program, a custom demo day for Fortune 5000 CMOs. Indy works alongside entrepreneurs on everything from product strategy to acquisitions to hiring, including periodically taking operational roles within our companies. He was an early Product & Engagement Manager at BloomReach, working on key go-to-market issues such as performance attribution and pricing. He was also the interim Head of Marketing at Captora, helping launch the company out of stealth and managing 2 product releases.

Posted on August 7, 2012, in Bain Capital Ventures, Big Data, Big Data Applications, Fundraising, SaaS, Software-as-a-Service, Valuations and tagged , , , , , , . Bookmark the permalink. 1 Comment.

  1. Thanks for the great post, well presented! do you believe this should apply for SaaS startups as well? for example we’ve just launched our SaaS startup a month ago, and we are projecting similar numbers on our model.

    All the best,

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