How to Value a SaaS Company

This white paper is written for entrepreneurs, angel investors, and the management teams of SaaS businesses. The intent of the paper is to describe the approach used by most professional investors and strategic buyers to value a SaaS company. By better understanding the concepts
and mechanics of valuing a SaaS business, management will be better able to articulate and maximize the value of their company, and also have a clear and more accurate estimate of the likely outcome of a sale process or equity raise. The framework described in this paper is designed to be adaptable to the public stock market environment well into the future.
About Global Documents

Global Documents provides you with documents from around the globe on a variety of topics for your enjoyment.
Global Documents utilizes edocr for all its document needs due to edocr's wonderful content features. Thousands of professionals and businesses around the globe publish marketing, sales, operations, customer service and financial documents making it easier for prospects and customers to find content.
saas COMPANY revenue VALUATION multiple saas business saas capital gross Margin growth rate
About Global Documents

Global Documents provides you with documents from around the globe on a variety of topics for your enjoyment.
saas COMPANY revenue VALUATION multiple saas business saas capital gross Margin growth rate
<p>www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 1
HOW TO VALUE A SAAS COMPANY 
This white paper is written for entrepreneurs, angel investors, and the management teams of 
SaaS businesses. The intent of the paper is to describe the approach used by most professional 
investors and strategic buyers to value a SaaS company. By better understanding the concepts 
and mechanics of valuing a SaaS business, management will be better able to articulate and 
maximize the value of their company, and also have a clear and more accurate estimate of the 
likely outcome of a sale process or equity raise. The framework described in this paper is designed 
to be adaptable to the public stock market environment well into the future.
Like all businesses, a SaaS company is worth what a buyer and seller can agree upon, and is based upon an estimate 
of the current value of its future cash flows. That simple sentence includes two important concepts: 1) real SaaS 
valuations are determined in the marketplace between two parties, and 2) the basis for the negotiation is a set of 
assumptions about the size, timing, and predictability of the future cash flows generated by the business. 
In the following pages we will try to add insight into both the general parameters of the marketplace, and the key 
assumptions about future cash flows common to all SaaS businesses. 
The paper is broken into seven sections: 
1. Basic Valuation Formula 
2. State of the Markets (Public and Private)
3. The Private Company Discount
4. Company-Specific Value Drivers
5. The Balance Sheet
6. Other Value Drivers
7. Example Valuation Analysis
The Basic Valuation Formula:
For SaaS businesses, the net present value of future cash 
flows has been reduced to a shorthand formula based on 
a multiple of the company's annualized recurring revenue 
(ARR). 
ARR x Multiple = Company Value
WHITE PAPER: COMPANY VALUATION
.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
SaaS Capital
Sources: NASDAQ, Pacific Crest Securities, Bessemer Venture Partners, 
CapitalIQ, Saphire Ventures and Redpoint Ventures.
Median Public SaaS Company Valuation Multiple
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 2
Anything that will impact the size, timing, and 
predictability of future cash flows will be incorporated 
into the revenue multiple, including company-specific 
factors such as growth rate, gross margins, retention, 
and market size. Macro factors, which are generally 
accounted for in an index of publicly traded SaaS 
companies, also influence the multiple. 
The company-specific factors drive the projected 
cash flows, and public company multiples reflect 
the implicit macroeconomic discount rate. Said 
differently, the macro environment sets the baseline 
valuation multiple for an "average" SaaS business, 
and the company-specific factors adjust it from there. 
Sometimes the baseline multiple is 7 times ARR, 
sometimes it's 2; it just depends on when you are 
selling. On the previous page is a chart of the median 
public SaaS valuation multiples since 2007.
We will further develop this public market baseline 
multiple below in the "State of the Market (Public)" 
section. 
Why do SaaS companies trade on ARR, while all other 
businesses trade on EBITDA or Net Income?  
The basic reason is that for growing SaaS businesses, 
net income takes a long time to materialize, even 
if underlying unit economics are solid. Sales and 
marketing expenses are recognized up front, while 
revenue lasts many years. This makes new customers 
unprofitable in the short term, even though they will 
be profitable over their lifetime. 
If a SaaS business is growing quickly, there are more 
new (temporarily unprofitable) customers than 
older, more profitable customers. Therefore, the total 
company net income will be negative even though 
if the business simply stopped growing, it would 
immediately throw off cash. For this reason, revenue 
is a better indicator of long-term cash flow than is 
net income or EBITDA. This will change over time 
as the sector matures, but even for the largest SaaS 
businesses today, there is little relationship between 
overall profitability and valuation. 
What is included in ARR?  
On an individual company basis, it's relatively easy to 
split out the different revenue streams (i.e. recurring 
software license revenue, implementation revenue, 
custom work revenue, etc.) and potentially value 
them differently based on their profitability and 
predictability. We see this done a fair amount and 
discuss later in the paper. Remember, however, 
that most valuation benchmarks, both public and 
private, are based on total revenue under the general 
assumption that the majority of revenue is recurring 
license revenue. 
Data from our annual survey of over 400 private SaaS 
companies indicate that average SaaS businesses 
generate 80% of their revenue from licensing and 
20% from professional services. If your revenue 
streams have that ratio or higher, there is no 
separate adjustment for revenue mix, and 100% of 
your company's revenue should be included in the 
valuation formula. If your ratio is significantly below 
80%-20% software to services, your multiple will be 
lower, and beyond some level, the business may not 
be viewed as a pure-play SaaS company and may 
therefore be valued using a different methodology. 
Valuation adjustments for lower gross margins 
resulting from a higher percentage of services revenue 
are accounted for separately.
Having outlined the basic approach, let's turn to the 
current state of the markets first, and then discuss 
each of the company-specific factors second. Keep 
in mind, the general market conditions change 
constantly, so you will need to refresh the public 
data in this section whenever you calculate a specific 
"Anything that will impact the size, 
timing, and predictability of future cash 
flows will be incorporated into the revenue 
multiple."
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 3
valuation. We have identified the approach and 
resources you can use to do so. 
The State of the Market (Public)
The public market is the backbone of the framework 
because it provides freely available, real-time 
valuation data. Bessemer Venture Partners does 
a good job tracking a SaaS-specific index that is 
shown below. Simply go to their site at any time for 
the most recent version: (bvp.com/strategy/cloud-
computing/index).
 
There are some interesting trends to point out in the 
data above. In the larger scheme of things, investors 
in the SaaS sector have significantly outperformed 
other equity indexes over the last four years. It's 
also clear that these are volatile stocks, subject to 
large price swings in both directions. (Since we 
started writing this paper, until its final release, 
valuations increased 17%.) Early 2014 saw a large 
correction, as did early 2016. That said, there are two 
primary factors protecting SaaS valuations from a 
fundamental sector meltdown:
1. Underlying trends of cloud infrastructure and 
SaaS application adoption are more supportive 
than ever before.
2. The business model does not lend itself to a 
crash. Through the 2008 recession, no public 
SaaS businesses had an actual decline in 
revenue, and all shifted their cost structure to 
immediately become more profitable.
So while we believe SaaS valuations are subject to 
corrections in the public markets when prices are 
overvalued, we also believe they have a natural floor 
of support in a stock market or economic downturn. 
As the chart to the left clearly indicates, when 
possible, it has been a good strategy to delay the sale 
(or a capital raise) of a SaaS business if prices have 
dropped well below their historical norms. 
Investors and corporate buyers quickly react (more 
quickly on the down-side) to changes in the public 
market. As of the writing of this report, the relevant 
public market valuation data is displayed below. This 
is a direct download of the Bessemer Cloud Index 
spreadsheet.
What the chart conveys is that a typical public SaaS 
business has $298 million in revenue, is growing 
at 26% year-over-year, has gross margins and 
retention rates of 71% and 93% respectively, and is 
worth about 6.1 times expected 2016 revenue as of 
8/9/2016. So, now we have a starting point.
The great thing about public market data is you can 
easily find it, and it's updated every few seconds. The 
weakness in the data is that it is not representative 
of most private SaaS businesses, which are generally 
much smaller.
Multiples
Operating Metrics
Date:  August 
9, 2016
Market Cap
EV/Revenue
P/FCF
2016
EV/EBITDA
2016
Revenue
2016
Growth
15 - 16
Gross
Margin
Gross
Retention
2015
2016
Median
$1,913
7.8x
6.1x
45.8x
30.9x
$298
26%
71%
93%
Mean
$4,784
8.3x
6.3x
41.2x
32.3x
$517
28%
71%
100%
Low
$106
0.6x
0.6x
18.7x
14.8x
$73
5%
46%
80%
High
$57,065
  23.8x
16.4x
75.0x
54.1x
$6,649
68%
89%
187%
(40%)
0%
40%
80%
120%
160%
200%
240%
BVP Cloud Index
Nasdaq Index
S&P Index
Dow Jones
SaaS Capital
BVP Cloud Index
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 4
State of the Market (Private)
The drivers of value in the private markets are the 
same as in the public markets, although the valuations 
tend to be lower because the companies are typically 
smaller (riskier) and the investors do not have liquidity 
in the shares (they can't buy or sell them whenever 
they want). 
Private SaaS valuation numbers are hard to come by, 
but we have tapped two primary sources for this paper. 
The first source is our own portfolio of companies, 
eleven of which have sold shares within the last 
20 months in either a sale of the company, or in an 
institutional equity raise. The second, a much larger 
data set, is from our friends at the 451 Group who track 
and report on technology company data for a living.
Half of the SaaS Capital equity events were due to 
the sale of a business, and the other half were from 
equity financings. The average valuation over the last 
20 months was 4.1X ARR, and the median was 3.8X. 
On average, the businesses were growing at 35% year-
over-year at the time of exit, and had $9 million in ARR. 
Over the last two-and-a-half years, the 451 Group has 
tracked over 800 private SaaS exits. The mean revenue 
multiple for those transactions was 6.0 times ARR in 
2014, 4.8 times ARR in 2015, and 4.3 times ARR to-date 
in 2016. The businesses were similar in size to those in 
the SaaS Capital portfolio at about $8 million in ARR, 
although we do not know the growth rates. 
Based on these data points, the private market multiple 
for an "average" SaaS business growing at about 40% 
has averaged 4.0 times ARR during the second half of 
2015 and the first half of 2016.
To be clear, however, the public market has rebounded 
and recent private exits have as well. The appropriate 
multiple adjustment of the recent valuation increases is 
accounted for in the next section.
 The Valuation Multiple Spread
Because the public market numbers change so 
frequently, and the private valuations are hard to find 
and are at a considerable time lag, the best approach for 
valuing a private SaaS business at any point in time is to 
isolate the private-to-public market discount, which is 
relatively constant, and then apply that discount to the 
current public comps.
The discount has generally remained between 1.5 times 
and 2.5 times ARR when comparing private and public 
companies of similar growth rates at similar points in 
time. Based on the private data above, and the public 
market comps over the same time period, the current 
private company discount is 1.9 times on an ARR basis. 
Unfortunately, and to add to the confusion, private 
valuations are generally reported on an annualized 
revenue basis (ARR), while public valuations are reported 
as a multiple of either the prior calendar year revenue, or 
the expected current calendar year revenue. And while 
it's possible to estimate current ARR based on expected 
calendar year revenue, and vice versa, the relationship 
between the two actually changes over the course of 
the year.  
For simplicity purposes, and recognizing this is only 
one of a myriad of other factors driving valuation, our 
analysis suggests applying a 1.3 times discount to the 
"Expected Current Year" public revenue multiple gets 
you to a current private ARR valuation multiple. Using 
1.3 times instead of the actual ARR discount of 1.9 times 
will compensate for the fact that the public multiple 
is based on expected future revenue and the private 
multiple is based on actual current run-rate revenue. The 
math as of August 2016 was: median public valuation 
multiple based on expected 2016 revenue of 6.1 times 
(see Bessemer Cloud Index table), less the discount of 
"Applying a 1.3 times discount to the 
'Expected Current Year' public revenue 
multiple gets you to a current private 
ARR valuation multiple."
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 5
1.3 times, equals the private ARR multiple of 4.8. This is a higher multiple than the actual private market data above 
because that data spanned many months and several stock market fluctuations; a multiple of 4.8x ARR is consistent 
with current public markets which have risen significantly over the last few months.  
As mentioned, this discount is relatively consistent across time and is particularly relevant to smaller SaaS businesses. 
For larger SaaS businesses above $50 to $75 million in revenue, private and public values actually converge, and might 
possibly invert, because those businesses have the scale to go public but choose to remain private. 
So if your SaaS business is private, does not have the revenue to go public, is growing at around 40% year-over-year, 
and has "average" gross margins and retention rates, current market comparables would suggest it is worth about 4.8 
times ARR as of August 2016. 
Update this base level multiple at any point in time by subtracting the private discount of 1.3 from the then-current 
median public expected revenue multiple pulled from the Bessemer Cloud Index. The chart below graphically 
illustrates the composition of the multiple.
< $40M revenue, 40% growth; average GM and net retention rates
$298M revenue; 26% growth; 71% gross margin; 93% retention
2.0x
4.0x
6.0x
8.0x
10.0x
Private Company Multiple
Private Company Discount
Public Company Multiple 
at Time of Event
Revenue Multiple
6.1x
4.8x
(1.3x)
SaaS
Capital
Company-Specific Drivers:
Having established the basic formula of SaaS valuations as a function of ARR, and having established a way to calculate 
the baseline ARR multiple at any point in time, it's time to analyze the company-specific factors that will drive that 
multiple higher or lower. To maximize value, individual company characteristics need to be carefully evaluated, 
isolated, and placed in the overall context of the broader market.
Drawing from our experiences selling and financing hundreds of companies, our proprietary research of over 1,000 
private SaaS Companies, as well as public market data; we have put together a list of value drivers every operator 
should pay attention to as they go about preparing for an equity raise or sale of their company. 
Listed in order of importance, the company-specific financial valuation drivers are:
1. Growth and Scale of Revenue
2. Addressable Market Size
3. Revenue Retention
4. Gross Margins
5. Customer Acquisition Costs
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 6
Valuation Driver #1  GROWTH and 
SCALE of Revenue
How much revenue is there today? How long will it take to 
get bigger, and how likely is it to happen? 
Historical growth rate is the single biggest driver of 
valuation. In fact, it has dwarfed all other factors for a 
long time. The reason growth is so important is that it 
indicates both the timing and the likelihood of future 
profits. Faster growth means larger expected cash flow 
sooner, and because of the recurring revenue model, 
high historical growth rates are a good indication of 
future growth rates.
The relationship between growth and a higher revenue 
multiple is easiest to see in the public market and 
is shown in the chart below. The correlation is not 
perfect, but it is very strong at 0.78 and outweighs 
all other metrics by a long shot. The faster-growing 
businesses are getting the higher multiples, while the 
slower-growing businesses are getting lower multiples. 
The companies included in the chart below are all 
traditional B2B SaaS companies and it excludes firms 
like LinkedIn and LifeLock, which are in the Bessemer 
Cloud Index but operate meaningfully different 
models.
The size of the bubbles on the chart indicates 
the relative size of revenue of each company and 
demonstrates that both growth rate and the overall 
scale of the business lead to higher valuations. You'll 
see in the chart that for the same growth rate, the 
larger bubbles receive a higher valuation multiple 
than smaller bubbles. Larger companies are less 
risky, and if they are still growing nicely at scale, by 
definition, they have a large addressable market. 
Companies above the median growth rate of 28% 
had revenue multiple 3 points higher (7 vs. 4) than 
those below the median growth rate. Companies 
above the median revenue size of $340 million had 
revenue multiples 3.1 points higher than smaller 
businesses with the same growth rate.
In translating the chart into the private markets, it 
is important to recognize that it is much easier and 
more common for a $5 million ARR business to grow 
at 40% than it is for a $500 million ARR business. This 
is simply due to math (size of the denominator) and 
the normal growth curve, which slows over time 
for all businesses. (Refer to SaaS Capital Research 
Brief 6, The Daunting Math of Growth, for more 
details.) Byron Deeter at Bessemer Venture Partners 
frequently points out that smaller SaaS companies 
often fail to recognize this, and likes to point out that 
they are growing faster than their public competitors 
and, therefore, should get a premium valuation. 
The relevant comparison, however, is to compare 
the growth rates of the companies when they were 
both the same size. Many public SaaS business now 
growing at 25% were growing at 200% when they 
were $5 million or $10 million in ARR. 
Source: Bessemer Venture Partners, August 15, 2016
.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
Revenue Valuation MultipleRevenue Growth Rate
SaaS Capital
"Historical growth rate is the single 
biggest driver of valuation."
Revenue Multiple vs Growth
(Bubble Size = Annual Revenue)
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 7
The basis for being able to support a valuation "growth 
premium" is whether your company is growing faster 
than its similarly-sized peers. 
Below are the median and average growth rates for 
SaaS businesses of different sizes based on our 2016 
survey of over 400 private SaaS companies.
If your business is growing faster than its peers based 
on the chart above, you should be able to objectively 
garner a higher multiple. How much higher? You could 
look to the slope of the line on the public market graph 
for guidance, but that is not actually that useful. 
As the companies get bigger, growth rates converge, as 
growth is much harder to achieve. Therefore, for larger 
public businesses, every 5 percentage point increase in 
growth rate increases the valuation multiple by almost 
2, which is a huge difference. 
0
20
40
60
80
100
120
140
Less than $ 1
million
$1 - $5
million
$5 - $10
million
$10 - $20
million
$20 - $50
million
Above $50
million
Average Growth Rate
Median Growth Rate
SaaS Capital
The premium is not that high for a 5 percentage point 
change in growth rate for smaller private companies, 
and it is also not that precise. Below, however, we 
attempt to parse the impact of growth on the multiple.
If your SaaS business is below $5 million in revenue, it 
needs to be growing at least 50% to get the average 
multiple of 4.8 times ARR. A premium would be 
justifiable for growth rates above 60% for companies of 
this size, and could bump the multiple up 1 to 2 times. 
Above 75% growth, the premium could get to 3 to 5 
times or more if accompanied by a large addressable 
market.
For larger SaaS businesses in the $10 to $30 million 
range, a growth premium will become relevant above 
35% revenue growth. Larger SaaS businesses growing 
above 50% could easily see premiums of 2 to 5 times 
for a total ARR multiple of 7 to 10 based on current 
public multiples. 
"The basis for being able to support a 
valuation 'growth premium' is whether 
your company is growing faster than 
its similarly-sized peers."
< $40M revenue, 40% growth; average GM and net retention rates
$298M revenue; 26% growth; 71% gross margin; 93% retention
2.0x
4.0x
6.0x
8.0x
10.0x
Growth Rate if Revenue >$5M
Growth Rate if Revenue <$5M
Private Company Multiple
Private Company Discount
Public Company Multiple 
at Time of Event
Revenue Multiple
6.1x
4.8x
50% - 60%
> 75%
< 35%
35% - 50% 
> 60%
< 50%
(1.3x)
SaaS
Capital
SaaS Company Growth Rates by Size of Business
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 8
For private companies raising money from VCs or PE 
firms, the growth imperative accounts not only for 
differences in valuation, but also in the likelihood of 
success. Slower growth SaaS businesses are difficult 
to get funded at any price. These businesses, and their 
existing investors and management, must find a way 
to demonstrate some organic growth that can then be 
leveraged with additional capital. Only then will it be 
worthwhile to invest the time and energy in external 
fundraising. 
On the M&A front, the growth imperative is almost as 
strong. There are exceptions when a corporate buyer 
is looking for a very specific need that can only be 
filled by a single company; however, buying criteria 
generally revolve around growth. "I can't even take 
an acquisition opportunity to my CEO unless they are 
growing faster than we are," said an SVP in a large SaaS 
business growing at 29%. 
Valuation Driver #2  MARKET SIZE
 How big can your business be?   
This is a key valuation battleground. Your business 
must be able to simply and credibly articulate it will 
generate large profits in the future. Keeping in mind 
that small businesses in small markets do not ever 
generate large profits, it is the size of your addressable 
market that establishes the upper bounds of your 
future cash flow and therefore your valuation.
For this reason, VCs and buyers dig deeply into the 
company's market size. They want to understand 
your "total addressable market" (TAM). In other 
words, if you sold all your current products to all 
the potential buyers of those products, how big 
would your company be? Investors will not pay a 
$50 million valuation for a SaaS business in a $100 
million market. The upside is too limited.
In our experience, managers and owners do not do 
a good job framing the market-sizing discussion. 
This is unfortunate because as operators you are 
in a much better position to build the case. With 
a little bit of research, the management team can 
put together a well-organized addressable market 
presentation that will generally be accepted by the 
investor.
There is little public data connecting the size of an 
addressable market to a revenue multiple because 
TAM itself is subjective. Generally speaking, TAM 
enters the valuation equation on the downside 
if the market size is too small. For many VCs, the 
target minimum TAM is $1.0 billion.
< $40M revenue, 40% growth; average GM and net retention rates
$298M revenue; 26% growth; 71% gross margin; 93% retention
2.0x
4.0x
6.0x
8.0x
10.0x
Total Addressable Market
Growth Rate if Revenue >$5M
Growth Rate if Revenue <$5M
Private Company Multiple
Private Company Discount
Public Company Multiple 
at Time of Event
Revenue Multiple
6.1x
4.8x
50% - 60%
> 75%
< 35%
35% - 50% 
> 60%
< 50%
(1.3x)
<$1.0 billion
SaaS
Capital
"It is the size of your addressable market 
that establishes the upper bounds of 
your future cash flow and therefore your 
valuation."
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 9
Valuation Driver #3  REVENUE RETENTION
How solid is the business you are building? 
Revenue retention is a significant driver of enterprise value 
because it touches upon all the key factors that impact the 
future cash flows of a SaaS business. High retention increases 
the size of the addressable market, increases revenue growth, 
and very importantly, improves predictability which reduces 
perceived risk. It also improves unit economics and profitability. Retention is cumulative as well, so small differences 
have a large impact over time. 
Our much deeper analysis on this topic, No Churn: Keep Customers and Improve Your SaaS Company Valuation 
- 2015 Update, details the multi-factor impact of improved customer retention. Our analysis suggests that a 1% 
improvement in net retention will increase the company's value by 12% over five years.
In the context of the valuation framework, however, it is important to isolate how retention impacts valuation. 
The primary impact is through improved growth rate and higher revenue over time. Those factors are already 
incorporated into the company's valuation based on its ARR and growth premiums. However, additional value can 
also be generated if the retention rate is above those of its peers because high-retention businesses are less risky 
and have better unit economics. Buyers and investors will pay a premium for businesses they perceive as predictably 
losing very few customers.
From our 2016 survey data, the median net retention rate (includes cross-sell, up-sell, and price increases) for private 
SaaS businesses is 100%. Above that level, a premium is justifiable. How much of a premium is hard to determine 
because retention rates are not consistently reported in public or private valuation data. We estimate the impact at 1 
to 2 times.
"A 1% improvement in net retention 
will increase the company's value 
by 12% over five years."
< $40M revenue, 40% growth; average GM and net retention rates
$298M revenue; 26% growth; 71% gross margin; 93% retention
2.0x
4.0x
6.0x
8.0x
10.0x
Net Retention Rate
Total Addressable Market
Growth Rate if Revenue >$5M
Growth Rate if Revenue <$5M
Private Company Multiple
Private Company Discount
Public Company Multiple 
at Time of Event
Revenue Multiple
6.1x
4.8x
50% - 60%
> 75%
< 35%
35% - 50% 
> 60%
> 100%
<80%
< 50%
(1.3x)
<$1.0 billion
SaaS
Capital
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 10
Valuation Driver #4  GROSS MARGIN and 
REVENUE MIX
Given your business's level of revenue, how much money can you make? 
Gross margin indicates the profitability level of the business per dollar 
of revenue when it reaches a more mature phase, and is a significant 
driver of valuation. Gross margin also determines how much cash 
a business can reinvest back into sales, marketing, and product 
development and, therefore, how capital efficient the business can 
be. For these reasons, the less direct costs required to deliver the SaaS 
revenue stream, the more valuable that revenue is.
Our private company survey data indicated the typical ratio of license revenue to professional services was about 4 
to 1 (80% to 20%). Related to the revenue mix, the overall gross margin was 84%, and the costs included in the gross 
margin were: professional service costs, hosting and related personnel costs, customer support, and any other direct 
cost associated with delivering the product. 
The gross margin for public SaaS businesses is only 71% as reported in the Bessemer Cloud Index. This is not 
consistent with what we see on an ongoing basis. That said, if you can establish 71% as the base case gross margin in 
your own valuation analysis, and your gross margin is higher than that, then all the better for you.
If your SaaS business is generating significantly more of its revenue from services, or has a meaningfully lower gross 
margin than the "norm" (i.e. your product requires a lot of third party data or services, or you have unusually high 
hosting costs), your revenue valuation multiple will be lower. To quantify the potential impact, it's possible to convert 
the ARR multiple to a gross margin multiple. 
As discussed above, the average private ARR multiple is 4.8x, and the average gross margin is 84% (using SaaS Capital 
data), so the average gross margin multiple is 4.8/84% or 5.71 times. See the table below as an example of how to 
estimate the valuation impact of different gross margins.
"Our private company survey 
data indicated the typical 
ratio of license revenue to 
professional services was 4 to 1."
Avg. SaaS Co.
Low Margin SaaS Co.
Revenue
$10,000,000 
$10,000,000 
Gross Margin %
84%
70%
Gross Margin $s
$8,400,000 
$7,000,000 
Gross Margin Multiple
5.7x
5.7x
Company Valuation
$48,000,000 
$40,000,000 
Implied ARR Multiple
4.8
4.0
This basic approach can be used regardless of what gross margin percentage is assumed to be the base case.
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 11
An alternative approach used to account for revenue mix and gross margin is to value the different revenue streams 
separately. To do this, and also to run the business effectively, the services revenue and license revenue should be 
isolated, and so should the direct COGS needed to support each. This is a good approach for SaaS businesses that can 
demonstrate significant gross margin contribution from their services work. 
Valuation Driver #5  CUSTOMER ACQUISITION 
EFFICIENCY and UNIT ECONOMICS
If I put a dollar in my SaaS machine, how much will I get out? 
Both investors and strategic buyers are typically looking to 
continue growing a SaaS business by deploying more capital in 
sales and marketing. How efficient the business is at converting 
that spending into new customers is highly relevant to both 
projected future cash flows at maturity, and also the amount of 
capital it will take to grow.
Businesses with high customer acquisition costs (CAC) require 
more capital to grow, and thereby, diminish overall returns 
whether the buyer is a VC, a corporation, or a public stockholder. 
Your CAC Ratio (CAC/lifetime value of a customer) is also relevant 
to your ultimate valuation because it is the best indicator of a 
company's core unit economics. The better that CAC Ratio, the 
higher projected future cash flow, and the higher the multiple of 
current ARR. Retention rates and gross margins drive customer 
lifetime value, and those items have already been identified and 
benchmarked, so the main point here is isolating the acquisition 
costs. 
"Businesses with high customer 
acquisition costs (CAC) require 
more capital to grow, and 
thereby, diminish overall 
returns."
< $40M revenue, 40% growth; average GM and net retention rates
$298M revenue; 26% growth; 71% gross margin; 93% retention
2.0x
4.0x
6.0x
8.0x
10.0x
Gross Margin
Net Retention Rate
Total Addressable Market
Growth Rate if Revenue >$5M
Growth Rate if Revenue <$5M
Private Company Multiple
Private Company Discount
Public Company Multiple 
at Time of Event
Revenue Multiple
6.1x
4.8x
50% - 60%
> 75%
< 35%
35% - 50% 
> 60%
> 100%
<80%
<75%           >85%
< 50%
(1.3x)
<$1.0 billion
SaaS
Capital
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 12
A related metric to CAC Ratio is "payback period." How long does it take (in terms of cash), to recoup sales and 
implementation costs? This is actually a purer measure of capital efficiency and is becoming an increasingly 
important valuation driver. A less-than-one-year payback is a good target for this metric.
THE BALANCE SHEET 
When getting into the final stages of valuation, the 
balance sheet will come into play and there will 
be a myriad of final "adjustments." Most of these 
adjustments are not specific to SaaS, and are made to 
account for specific sources or uses of cash, separate 
from ongoing operations of the business. Examples 
would be: a large cash balance in the bank account at 
closing, or a large long-term obligation that is being 
assumed by the buyer. Also, if accounts payable are 
unusually large, or accounts receivable are abnormally 
low, adjustments are typically made. If the company 
has a "normal" balance sheet relative to its peers and 
historical norms, then it is assumed that is the balance 
sheet required to support the current ARR, and no 
adjustments are made.
Deferred revenue is a balance sheet item relatively 
unique to SaaS, and we believe deserves separate 
consideration. Buyers will frequently argue that if they 
purchased ARR as a proxy for future cash flows, then 
deferred revenue represents cash that has already been 
collected and therefore not part of future cash flows 
and should be deducted from the price. This is wrong 
for two reasons: 
1. 
If the business continues to grow or at least 
maintain revenue, deferred revenue will never be 
"repaid." It is part of the normal working capital 
equation of the business and is actually a positive 
contributor to cash flow for a growing business. 
2. To satisfy the deferred revenue liability, the 
company merely needs to provision the service, 
not actually write a check as it would do for a bank 
loan or most other long-term liabilities. The cost 
to keep the servers up and running is a fraction 
of the amount of deferred revenue, so the future 
claim on the company's cash is actually much lower 
than what is on the balance sheet. If pressed, a 
fair counter you might suggest is to make a price 
adjustment equal to the deferred revenue balance 
times the cost of goods sold percentage.
< $40M revenue, 40% growth; average GM and net retention rates
$298M revenue; 26% growth; 71% gross margin; 93% retention
2.0x
4.0x
6.0x
8.0x
10.0x
Payback Period
Gross Margin
Net Retention Rate
Total Addressable Market
Growth Rate if Revenue >$5M
Growth Rate if Revenue <$5M
Private Company Multiple
Private Company Discount
Public Company Multiple 
at Time of Event
Revenue Multiple
6.1x
4.8x
50% - 60%
> 75%
< 35%
35% - 50% 
> 60%
> 100%
<80%
<75%           >85%
>12 months
<12 mos 
< 50%
(1.3x)
<$1.0 billion
SaaS
Capital
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 13
OTHER VALUATION DRIVERS
The factors listed above might make valuing a SaaS business seem more like a math exercise than it really is. In reality, 
there are a myriad of other factors that can impact a company's value, but they tend to be highly company specific 
and difficult to quantify or benchmark. Some of the other major value drivers to be aware of are:
1. 
Is the company a leader in its space? In the SaaS world, leaders tend to maintain and grow market share and 
garner a meaningful valuation premium.
2. 
Is the company a good strategic fit for a buyer? Beyond your SaaS company's own performance, how might it fit 
in with a buyer's existing business? What are the synergies? Should the buyer pay the seller for those synergies?
3. How strong (experienced) is the management team? This is particularly important when valuing an earlier-stage 
SaaS business when there is less clear financial data. 
4. 
Is there a technology advantage, technology debt, or an existing claim on the intellectual property? 
All of these factors, and others, can certainly impact value in a meaningful way; however, the impact is still generally 
within the context of an ARR multiple premium or discount. Beyond the scope of this paper is an approach for valuing 
less mature SaaS businesses which are sometimes acquired on a "buy vs. build" basis.
VISUAL GUIDE AND EXAMPLE VALUATIONS FROM OUR OWN PORTFOLIO
Throughout this study we've been developing the valuation framework, which begins with our public company 
benchmark and then builds in the appropriate valuation premiums and discounts. Below is the final framework in a 
visual format, followed by two actual portfolio company examples. Here is the framework, rotated for convenience.
.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
Public
Company
Multiple
at Time
of Event
Private
Company
Discount
Growth
Rate
Total
Addressable
Market
Net
Retention
Rate
Gross
Margin
Payback
period
ARR Valuation MultipleSaaS Capital
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 14
Portfolio Company #1:
 
Public company market multiple at time of 
transaction = 4.9x 
 
ARR run rate = $17 million 
 
Growth rate = 26% (lower than mean)
 
TAM = Currently serving large niche market, but 
larger market opportunity exists 
 
Net Revenue Retention Rate = 109% (very high)
 
Gross Margin = 84% (average)
 
Payback period = 15 months (average)
 
Valuation = 3.5x from a private equity firm
  
Portfolio Company #2:
 
Public company market multiple at time of 
transaction  = 5.1x 
 
ARR run rate = $45 million (large)
 
Growth rate = 230% (extremely high)
 
TAM = Niche Market, potential for expansion.
 
Net Retention Rate = 100% (average)
 
Gross Margin = 90% (high)
 
Payback period = 5 months (very high)
 
Valuation = 9.3X
Obviously, we built these charts already knowing 
the outcome. However, a blind application of the 
framework would have led to a relatively tight range 
of expected outcomes, including the final valuation 
number. 
.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
Public
Company
Multiple at
Time of
Event
Private
Company
Discount
Growth
Rate
Total
Addressable
Market
Net
Retention
Rate
Gross
Margin
Payback
period
ARR Valuation Multiple3.5x
SaaS Capital
.0x
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
9.0x
10.0x
Public
Company
Multiple at
Time of
Event
Private
Company
Discount
Growth
Rate
Total
Addressable
Market
Net
Retention
Rate
Gross
Margin
Payback
period
ARR Valuation Multiple9.3x
SaaS Capital
Conclusion:
SaaS companies, like any other, are worth the present value of their estimated future cash flows. For SaaS businesses, 
however, the best proxy of future cash flows is recurring revenue, not EBITDA, and so they trade based on a multiple 
of that metric. Because of their smaller size and lack of liquidity, private SaaS businesses generally trade at a 1.3 times 
revenue multiple discount to public SaaS companies.  At the publish date of this paper, an average private SaaS 
business was worth 4.8 times ARR. From there, the key drivers of the valuation multiple above or below the average 
are: growth and size of the recurring revenue, addressable market size, revenue retention, gross margins, and sales 
efficiency. Deviations from the mean in these metrics can swing the valuation multiple significantly and cumulatively, 
with revenue growth rate being the biggest value driver by far.
In understanding the basic methodology used by buyers and investors in SaaS businesses, operators and owners 
can better optimize and negotiate an appropriate valuation. Based on our experience, it is a myth that buyers and 
investors want an uneducated seller. Buyers want a reasonable and educated seller that can quickly and rationally 
come to a fair range on valuation. From there, the two parties may not ultimately agree on a price, but at least they 
will have a productive and informed conversation. 
www.saas-capital.com
 SAAS COMPANY VALUATION                                                                                                                                             
 
  
PAGE 15
ABOUT SAAS CAPITAL
 
SaaS Capital is the leading provider of long-term Committed Credit Facilities to SaaS 
companies. Focusing exclusively on the SaaS business model, SaaS Capital delivers 
faster decisions, more capital, and longer commitments. SaaS businesses have 
used SaaS Capital's Committed Credit Facilities, instead of equity, to finance growth 
and create hundreds of millions of dollars in enterprise value without sacrificing 
significant ownership or control. Also, through its partnership with DH Capital, a 
boutique investment banking advisory firm, SaaS Capital can assist with M&A and 
capital raising services. SaaS Capital has offices in Cincinnati, New York, and Seattle.  
Visit www.saas-capital.com to learn more.
 810 SEVENTH AVENUE, SUITE 2005 | NEW YORK, NY 10019
1225 HAYWARD AVENUE | CINCINNATI, OH 45208
7900 E GREENLAKE DRIVE NE, SUITE 206 | SEATTLE, WA 98103
IWWW.SAAS-CAPITAL.COM
TODD GARDNER | FOUNDER AND MANAGING DIRECTOR | TGARDNER@SAAS-CAPITAL.COM | 513-368-4814
ROB BELCHER | MANAGING DIRECTOR | RBELCHER@SAAS-CAPITAL.COM | 303-870-9529
</p>