Month to month growth drives SaaS valuation
SaaS companies, like the other sectors too, are worth the present value of their estimated future cash flow.
Compared to product business, SaaS is the winner takes it all -business. SaaS business valuation is different, because the revenue for the service comes over an extended period, the customer lifetime. Sales and marketing expenses are recognised up front, while revenue lasts many years. This is why SaaS business valuation model depends on the company’s growth stage.
For SaaS business, the best estimate of future cash-flow is recurring revenue (ARR or MRR). And it’s not only revenue but the month over month growth in revenue. Revenue growth is more than twice as important for determining valuation multiple.
Traditional product business focuses on EBITDA. This is also a good metrics for SaaS business, which has been reached a certain growth level but it does not show the progress well in the early growth company. Additionally, many SaaS companies capitalize their development costs and this improves EBITDA significantly. Instead of EBITDA, more valuable for a SaaS startup would be to track monthly customer acquisition costs and customer lifetime value development because those enable to track long-term direction based on the monthly development.
So, You want to maximise SaaS growth?
f You’re interested to learn more on SaaS valuation please read the original article at Arctic Startup released on January 2017
The author is the Founder and CEO at BackedByCFO, CFO As A Service from seed to IPO.
