Many of you have reached out to me asking for the source data in this post. Since it’s based on an internal analysis we did at Bain Capital Ventures, I thought I’d share the updated version of the data.
SaaS Valuations Grouped by Growth Rate & Margin (March 2013)
In short, looking across all public SaaS Co’s, high growth (>30% YoY), high gross margin (>70%) companies trade at 7.6X Enterprise Value / Next Twelve Months (EV/NTM) Sales, vs. industry wide average of 5.5X.
And growth rate matters more than gross margin. The top-left quadrant (low growth, high gross margin) trades at 3.7X. The bottom right quadrant (high growth, low gross margin) trades at 6.2X, if you strip out Workday.
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!