SaaS Valuation Explained: What It Is And How to Evaluate a SaaS Company

The software as a service (SaaS) industry has exploded in recent years. And while there’s some economic concern, it seems unlikely that industry growth will slow down any time soon. Fortune Business Insights reported that the market size for SaaS has grown from a valuation of $113.82 billion in 2020 to $130.69 billion in 2021 — and is on trend to reach $716.52 billion by 2028. 

Every high-growth SaaS company is trying to carve out its position in this massive market — trying to become the world’s next unicorn or even decacorn. But SaaS valuation is complicated, which is why finance and executive leadership need to work together to come up with the best approach. 

As you’re raising that next round of funding, this SaaS valuation guide will help you think through your company’s financial and market positions and work toward an appropriate valuation. 

What Is SaaS Valuation?

SaaS valuation is an appraisal process that determines a SaaS company’s present and future value based primarily on growth. The way investors look at growth changes as a company matures. In the earliest stages, the primary factors might be founder-market fit and growth potential. As you reach later SaaS funding rounds, metrics like net revenue retention and free cash flow come into play. But in all cases, the biggest driver of valuation is growth momentum.

Internally, the SaaS company valuation process begins by assessing what your company wants and needs from its next round, regardless of whether you’re pre-revenue, entering a Series C funding round, or pre-IPO. Define your funding goals through the following questions:

• What is the amount we want to raise?
• What does this money allow us to do? What are our goals?
• What is the equity/dilution we’re willing to give up? 
• What is our margin structure? 
• How much runway does this funding goal give us?
• How much do we need to get to our revenue goal?
• How do we give up the least amount of dilution?
• How will this funding round impact future funding rounds?

A strong finance function can run scenario analysis to help discover the most realistic answers to these questions. They work with founders and executives to map out the base, worst, and best cases for the raise. 

Equity and revenue will always be in conversation with each other for any funding round: With each round, a company gives up equity to investors—but you don’t want to give up so much that, if the company goes public, the founders and team members don’t have any stake/equity in the company. That is why you need to keep an eye toward the next round of funding even while you’re planning your current round — and part of that involves your valuation metrics.

The Key Factors in Determining SaaS Valuation (by Funding Stage)

Determining the right metrics and milestones impacts future funding rounds: If you don’t hit your milestones or measure your growth correctly, you lose credibility and interest from current and future investors. 

What matters to an investor who’s looking at a pre-revenue company differs from a company entering Series C. This is why founders have to go into the fundraising process knowing which metrics drive SaaS valuation at different stages of funding (and present them in their SaaS pitch deck accordingly).

Pre-Revenue and Early-Stage Companies (Seed Through Series A) Focus on Founders

Pre-revenue companies don’t go through a rigorous valuation process — they’re essentially priced based on what the founder asks for. If a founder wants to raise $5 million and doesn’t want to give up more than 10% of the business, the valuation is $50 million. Until you get to later stages of growth, valuation is more of a top-down exercise than a bottom-up one. 

Founders can come up with their task based on factors like the product pipeline and the current state of the market. Comparing your company to competitors and looking at the total addressable market (TAM) allows you to consider where you fit in the market and find what makes you stand out. 

While market fit is important, what makes a SaaS company stand out at this point are the voices behind it. Founders drive the unique story behind their business and can boost valuation by bringing their vision to life for investors.

But that’s not to say early-stage valuations are dart throws based on gut feelings about founders. Founders (and potentially first finance hires) must also forecast the potential for growth. 

In many cases, this means going deep on cash flow analysis, burn rate/runway calculations, and headcount planning to show how the company will go from pre-revenue to high growth. 

Growth Stage Companies (Series B) Focus on Revenue Growth

As a company ramps past the initial funding rounds, the focus turns toward revenue growth. The more revenue traction, the better the company looks to investors. That’s why the Series B funding round especially becomes about showing investors where growth can happen and how they can contribute to building an amazing business.

Jason Lemkis, founder of SaaS community SaaStr, believes optimal revenue growth has evolved into a “T3D2” (triple-triple-triple-double-double) pattern. Once a company hits $1-2 million in revenue, it should triple its revenue for the next three years, then aim to double it for two years after that. 

That’s what it takes to stand out in a crowded SaaS field these days. There are already 300+ SaaS and Cloud unicorn companies in the world. Now, the goal posts have changed — what investors are really looking for is the next decacorn. 

Pre-IPO Companies (Series C and Beyond) Focus on Retention and Path to Profitability

At Series B, companies have proven they can attract customers and grow revenue. For Series C and beyond, the emphasis shifts toward more formal revenue multiples, net revenue retention (NRR), and profitability — your ability to continuously strengthen the flywheel on the path to IPO. 

NRR has become a gold standard for measuring growth because it gives investors an effective understanding of lifetime value. 

Strong NRR means customer lifetimes will be longer and LTV will be higher. And as a result, your company can spend more to acquire customers than competitors with weaker NRR can. And when you have high NRR in that 120%+ range, you’ll have faster CAC payback periods, which means you can spend more aggressively to acquire customers.

In the run-up to IPO, coupling revenue growth numbers with this kind of deeper look into capital efficiency is crucial to valuation. A company growing 50% yoy with a 4x LTV:CAC ratio is a much better investment than a company growing 75% with a 1.5x LTV:CAC ratio.

Other Factors That Play a Role in SaaS Valuation

If you had to sum up the factors that make up a SaaS valuation, it would be hard to argue with revenue growth, revenue retention, and profit margin as the driving forces. 

But there’s so much more nuance to the science of SaaS valuation.

Private vs. Public vs. Mergers & Acquisitions

Valuation methods can change depending on whether a company is private, public, or if there’s a merger or acquisition scenario. 

There are three types of valuations to consider:

• Revenue Multiples: For private SaaS companies in high-growth phases (especially the more mature ones), revenue multiples are the general basis of valuations. Investors will benchmark startups based on revenue growth. In recent years, SaaS multiples have been anywhere from 10x to 20x revenue. But it’s important to note that market conditions dictate these multiples. When the startup market is hot (like it is now), multiples explode. But when the economy is in a rougher place and VCs have fewer funds to distribute, multiples can shrink. This is why it’s important for startups to raise on their own terms rather than finding themselves in a position of desperate need.
• Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): EBITDA is ideal for public companies because it measures net income before factors like taxes, interest, depreciation, and amortization. Operating profitability has a significant impact on a company’s performance on Wall Street and is a strong indicator of sustainability.
• Seller Discretionary Earnings (SDE): This type of valuation is typically used in mergers and acquisitions. SDE measures cash flow by subtracting any operating expenses and costs of goods sold from revenue (also known as cost of revenue in SaaS). It’s best suited for smaller businesses, where the owner plays an active role in the business and remains a sole stakeholder.

Customer Acquisition Cost and Customer Lifetime Value

Companies of all sizes can use customer acquisition cost (CAC) and customer lifetime value (LTV) to give investors insight into the efficiency of their business. How easily can you attract customers? How much value do they bring to your business over time? And what story does your customer retention rate and churn rate tell?


Having deep insight into CAC highlights exactly what it takes in marketing and sales costs to get the product in front of prospects and close the deals. And as your company matures and you gather more historical data, you can calculate CAC payback period based on cash collections to show investors how long it takes to make your acquisition costs back.

Determining LTV requires a lot of information: when they purchase the product, what the terms of their contract are, and any upgrades, downgrades, and renewals. But it’s worth the effort because the metric reveals the staying power of your products and services.

Investors (and, for those interested in acquisition, potential buyers) are eager to see a strong LTV:CAC ratio, as it’s essential for understanding and forecasting the long-term sustainability of your business. There’s an additional layer of security not only in cash flow, but also in how the product helps customers run their businesses.

How to Value a SaaS Company Based on Revenue

Accurate SaaS company valuation relies on knowing that, as your company grows, the multiples get more defined with each round. And as you progress, you have more data to pull from.

The four metrics that help to measure a SaaS company’s value based on revenue are:

• ARR (Business size)
• Growth rate (Momentum)
• Net revenue retention (Quality of product/service)
• Growth margin (Profitability)

Entrepreneur David Cummings has become the authority on creating quick SaaS valuation formulas to bring these metrics together. His initial valuation formula focused on ARR, growth rate, and net revenue retention with a general baseline multiple of 10:

Valuation = 10 x ARR x Growth Rate x NRR

The next iteration redefined the multiple as “market sentiment,” determined by the enterprise market value divided by company revenue. Cummings also considered profitability in the form of a growth margin:

Valuation = Market Sentiment x ARR x Growth Rate x NRR x Gross Margin

Upon further introspection, Cummings simplified his formula with the SaaS Rule of 40, which balances growth and profitability alongside cash burn.

SaaS Rule of 40 Total = Growth rate % + Profit %

With growth and profit accounted for, Cummings’ formula now offers an even more accurate sense of valuation: 

Valuation = ARR x Rule of 40 Total x Market Sentiment

Market sentiment serves as the multiple, and ARR notes business size. The Rule of 40 accounts for the cash burn rate alongside profitability, making valuations more realistic.

SaaS Company Valuation Examples and Return on Equity

Founders and finance leaders could go down a rabbit hole of complex calculations and considerations when trying to come up with the right valuation. 

But if you can find a way to always go into a funding round in a position of strength, it’ll be easier to dictate your own terms and get the valuation you want. Let’s make one thing clear — raising money as a startup leadership team isn’t easy. However, the following are just three examples of SaaS companies that show the power and value of fundraising from a position of strength.

Zapier 

Zapier has raised just $1.4 million in venture capital over its lifetime (back in 2012. They turned that small investment into $140 million in ARR and a valuation of over $5 billion as of 2021. The company’s deep commitment to operational efficiency and customer expansion drove profitability early and has made Zapier elite in terms of its valuation relative to the total amount raised.

Snowflake 

Snowflake grew from a $900,000 seed round in 2012 to a $479 million Series G in February 2020 at a valuation of $12.4 billion. And they had the biggest software IPO ever in late 2020 when they were valued at over $65 billion. Snowflake’s consumption-based pricing and strong partnership ecosystem have helped the company create an ARR snowball that led to near-total market dominance.

Fivetran

Fivetran earned unicorn status with employee growth from 80 to 400 and a $1.2 billion evaluation in 2020. In 2021, they funded a $565 million Series D and are now valued at $5 billion. Fivetran has always had unique market positioning. But a decision to shift from subscription-based pricing to usage-based pricing helped align the company better with market expectations and customer needs. And that’s one reason they’ve continued to scale well beyond unicorn status. (Listen to VP of Finance Kalor Lewis talk about all this in an episode of The Role Forward podcast.)

Each of these companies has proven an ability to maximize valuation. The next step is justifying those valuations by showing a significant return on equity. That’s where even more nuance to the valuation process comes into play. It’s possible that given Zapier’s funding journey, they’ll have a much higher return on equity than a company like Snowflake — even if Snowflake has the higher valuation and had a record-breaking IPO.

How to Increase the Valuation of a SaaS Company

There’s no universal answer to how a company can increase its valuation. As much as there’s a science to the valuation process, there’s so much that seems left to chance, timing, and a variety of external factors.

But that doesn’t mean founders and finance teams can’t take steps to help increase the valuation of their SaaS companies. And unsurprisingly, they boil down to building a fundamentally-sound high-growth company that has an eye toward sustainability.

Raise from a Position of Strength

There’s a major difference between needing to raise a round just to keep up with burn and choosing to raise a round because the time is right for your company.

In the first scenario, you’re raising a round without much leverage — investors will drive down your valuation because they know your position. But in the second scenario, investors might be coming to you offering investments of their own volition. 

Running your company efficiently, maintaining open communication with the VC community, and continuously proving that your company is growing significantly will put you in that position of strength and help you dictate a stronger valuation.

Review Your Pricing Strategy

Conduct market research and compare your SaaS pricing strategy to competitors as often as possible. You may be missing out on growing your cash flow if you’re priced too conservatively for your company’s growth stage. Or, your pricing model may not be set up to scale alongside your customers, hurting NRR in the process. The more you can align pricing with customer value, the stronger your revenue growth will be.

Keep Your Books Clean

Historical data is everything to SaaS company valuation: The numbers tell the story of your company, and accurate books mean better accuracy for SaaS valuation metrics. Clean financial reports allow you to identify opportunities to improve your margins and plan for particular milestones before entering another funding round. 

Grow Your Management Team

Owner involvement impacts valuation immensely, from calculating pre-IPO value to enforcing a company’s narrative. Bringing managers in, whether at the executive or department level, shows that the business is growing and that it can identify how to steadily manage cash flow and burn rates through planning headcount and growing responsibilities accordingly. 

Acquire or Partner with Other Companies

Acquisitions bring in an additional customer base, meaning more revenue as long as you continue to prove value for them. Partnering with other companies allows brand recognition and trust to grow among existing and new customers.

Win Awards

Awards are not just for quick publicity—they attract top-tier talent and build credibility. They keep your company narrative growing, showing how you’ve impacted the industry and preserved the quality of your company culture and product. 

Your Strategy for Approaching Your Next Funding Round Is Easier Than You Think

Funding rounds are cyclical: When one ends, the preparation for the next round begins. You need the tools and resources to maintain real-time visibility on your financials and milestones while also planning for the future. 

While marketing and sales teams attract customers, your finance team can deploy the same strategic thinking toward how to prep for investor meetings and strategize for future funding rounds. Instead of pulling data from multiple, disconnected sources, your finance team could pull everything together with a Strategic Finance Platform. Mosaic brings your data sources together—and can forecast based on real-time actuals. 

Ready to take your SaaS valuation to the next level? Request a personalized demo today.