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!