A Ferrari and a VW Bug Can Both Go 60 MPH

5x ARR, 3.6x ARR, 10x ARR

If you have been in the SaaS world long enough you will hear people toss around valuations based on ARR as if they are irrefutable laws involving just three pieces of information:

  1. Your company is a SaaS company
  2. Your ARR
  3. The numeric multiple du jour
Photo by Darren Price / CC BY

A Ferrari can go 60 MPH. A VW Bug can also go 60 MPH. Buying a Ferrari will put a noticeable dent in your bank account. Getting a VW Bug should be a little easier. Why?

Photo by Eric Wüstenhagen / CC BY-SA

Why aren’t they priced the same if they both can go 60 MPH?

Acceleration. Why does that matter? Because, if you can get to 60 MPH faster in a Ferrari than in a VW Bug then you can cover more ground in the same amount of time while sitting in a leather-wrapped cockpit.

A startup on day 1 is worth $0.

Sorry. It’s true. Thus, the faster you can get from this worthless state to something of value, the better, right? The entire field of finance is based on the single premise that getting something of value today is better than getting that same thing tomorrow.

If your startup can reach $10 mm in revenue faster than another startup then the world will pay more for your company. None of us is getting any younger so a faster ramp-up is valuable.

Photo by Paul Kehrer / CC BY

Know who your peers are.

Using ARR and a multiple to rough out a valuation for your company is not complete snake oil, though. It will give you a good approximation of your company’s value, provided you are running in the same pack as those companies that were used to calculate the ARR multiple. However, unpacking this further, you need to be growing as fast as the pack, at a meaningful revenue level, strong gross margins, a solid LTV to CAC ratio, and so on.

That’s the key caveat missing when most people talk about ARR multiples for valuing SaaS companies: running in the same pack.

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