The software-as-a-Service (SaaS) market experienced a record-breaking year in 2021. Investors exuded confidence with $621 billion total venture capital investments made into private companies (CB Insights). A large share of those dollars went into SaaS companies, and record 2020 highs of public technology stock valuations held firm in 2021.
Growthink’s experience mirrored these broader trends as more SaaS companies than ever approached us looking for ideas and strategies to accelerate growth, raise capital and achieve shareholder liquidity.
A core question we get asked often by our clients is, “What is my company worth?” and, relatedly, “What are the best strategies and tactics to increase my likelihood of and timeline to a financing?”
Generally SaaS companies are valued at a premium to other firms given the recurring nature of revenues, asset-light operations, high profit margins, and more predictable, less cyclical revenue and earnings.
Top Private SaaS Company Valuation Considerations
SaaS firms with at least $3 million in ARR and 100% year-over-year growth are typically valued using a multiple of annual recurring revenue (ARR). Multiples are influenced by many factors, with the most important being:
What is Your Rate of Growth?
It might seem obvious but fundamental to valuation is that, the faster the year-over-year and monthly recurring revenue growth rates the higher the valuation multiple will be at financing.
In 2021, Growthink Capital Research saw private SaaS company valuations range from 3-9x ARR based on numerous factors) and anticipates similar ranges for the first half of 2022.
How Loyal are Your Customers?
Companies with at least 80% true recurring revenue command premium SaaS valuations. Recurring revenue typically comes in the form of auto-renewing subscriptions, and monthly recurring revenue (MRR) is considered more reliable than ARR.
While multi-year licenses, services contracts and other sources of revenue are impressive from top- and bottom-line perspectives, investors typically do not value them as highly from a multiple perspective.
What is Your Total Addressable Market?
SaaS companies often compete in a narrow total addressable market (TAM), with a small serviceable addressable market (SAM) and a niche serviceable obtainable market (SOM). A TAM of $100M or less is considered small, while a defendable TAM of ~$1B is attractive for investors and often leads to valuation multiples at the higher end of the range.
How robust and experienced is your team?
Successful past exits by a SaaS company’s management team boost investor confidence. Additionally, having key C-level positions in place bolsters investor confidence that their dollars can immediately be put to work by proven people who are competent and experienced.
Many other elements, such as company size/scale, competitive differentiation, amount of capital raised to date (or are you bootstrapped?), customer acquisition costs (CAC), customer lifetime value (CLV) and churn rate, also factor into valuation. Similarly, so do patented intellectual property and having a defensible customer acquisition strategy in place (even if you’re in the early stages of execution).
We project that 2022 will be another exciting year to grow, finance and sell SaaS businesses across a wide range of industries as our economy continues to fundamentally shift toward on-demand software to power our complex modern lives.
We are always interested in connecting with dynamic entrepreneurs and executives that are either leading SaaS business now, or would like to explore the potential to pivot their existing product and service offerings to a SaaS model. Please don’t hesitate to email us as [email protected] for a complimentary consultation and to learn more about Growthink’s strategic advisory and investment banking offerings for SaaS businesses.