How To Maximise The Valuation For A SaaS Business
Arctic Startup posts an interesting article about how to maximise the valuation of a SaaS business. They argue that valuations for Software As A Service businesses work differently as the revenue from a customer is spread over an extended period while expenses like marketing are paid up front – the valuation needs to take into account 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 capitalise 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.
They go on to explain how you can maximise monthly MMR, reduce churn and increase customer lifetime value … which feeds into the valuation of the business itself. The full article is here.