If you’re trying to build a SaaS business with high valuation potential, you need to focus on metrics that matter. There are so many ways to measure a SaaS business these days, it’s easy to get lost in spreadsheets. If you’re focused on the wrong metrics, or can’t prove your results, you’ll have a hard time convincing investors that your business is worth their time.
That’s why you should focus on the metrics that investors care about. If your goal is to raise a round of funding to accelerate growth, you need to think like an investor and keep things simple.
I’ve learned that SaaS investors really only consider three metrics:
- Year-over-year revenue growth rate
- Net revenue retention
- Speed of payback
If you just focus on these three elements of unit economics – it’s all you need to win the valuation game (and build an enviable business). And you can be confident you’re measuring the right things in your business.
Here’s what you need to know about three metrics to build a SaaS business with a 20x or higher multiple.
1. Year-Over-Year Revenue Growth Rate
Investors want to see that you’re already growing before they get on board. The first metric they’ll check is your year-over-year (YoY) revenue growth rate to ensure you’re already seeing success.
The north star here is 120% year-over-year growth.
For smaller SaaS companies like most of my clients, this is very achievable – on a QUARTERLY basis. How do you create that? With growth hacking: being able to get customers predictably without expensive or complex marketing.
Focusing on solving a specific problem for a specific person is key to dominating a market. When your solution does that, you’ve got product-market fit.
The fastest-growing companies have found and serve massive pre-existing demand in their market. They understand the problems they’re solving in their market better than anyone else.
It’s why many of my most successful clients are technical founders – they know the problems they solve intimately because they lived with it in a prior life.
High growth SaaS companies don’t make assumptions about their audience — they research to learn everything they can about their customers’ current and desired situations on every sales call. They know where their customers are and where they want to go.
I call this ‘owning the transformation’ and it’s a big part of the approach I teach.
They also have a large enough market to support a high growth rate. If the market for a given solution is limited to the top 10% of the Fortune 500 — they’ll run out of potential customers much too quickly.
To recap, the keys to highYoY growth rates when you have:
- The ability to growth hack
- An excellent understanding of your audience
- High demand for your solution
- A large enough market
For example, Optimizely raised funding at a $600 million valuation in 2019 with $110 million in revenue. That’s a multiple of slightly more than five. It achieved this with a YoY growth rate of 7%.
Meanwhile, the faster-growing Greenhouse was valued at $820 million on $86 million in revenue — a solid multiple of 10 — because it had a YoY growth of 20%. That’s a huge difference.
The term to remember here is NTM multiple, or “next twelve months multiple.” You simply multiply your current annual earnings by your growth rate multiplier to showcase your business’s immediate value.
2. Net Revenue Retention
While your YoY growth rate is a measure of external growth, net revenue retention (NRR) is your internal growth. Instead of the focus on bringing in new customers, this metric is all about selling your existing customers more. When you’re retaining more revenue per customer, this is excellent for higher valuations.
Here’s an example: Gong’s net revenue retention is 150% compared to QuickOrder’s 131%. Both companies were recently valued, and Gong commanded a multiple of 37 compared to QuickOrder’s multiple of seven.
Gong is just better at landing and expanding.
A 19% difference in net revenue retention can make a significant difference. In this case – almost a six times higher multiple.
Growing your net dollar retention is a critical factor in valuation calculations. The idea here is to land and expand to scale your MRR. This can mean upselling, it can mean expanding what services you offer, or it can be as simple as keeping your customers longer than average (with a low single digit churn rate).
120% NRR is an excellent benchmark to aim for. SmartKarrot published an excellent NRR article and calculation that can help you learn more.
3. Speed of Payback
SaaS Founders need to be more than just good leaders — they need to be efficient capital allocators.
With deflation on the rise and the ability to get strong returns on capital through the right marketing, cash has become a significant liability on the balance sheet.
Contrary to popular belief, cash is NOT king. Cash is trash if not put to work.
Use it to create revenue: Cash FLOW is king.
The beauty of bootstrapping with low cash reserves keeps you focussed on making every dollar work.
I’m hyper focused on getting my clients to yield quick returns on their capital. The longer it takes to get a return, the bigger your “cash gap,” (how long it takes to turn strangers into customers).
In the beginning, the most significant investment most SaaS companies make is the customer acquisition process. And the longer it takes to acquire a customer and get the return on the sales cycle, the more financially risky the business.
For most B2B SaaS plays, it shouldn’t take more than three or four months to get a customer.
With enterprise deals, it can reasonably take up to a year. And the lifetime value of those customers should be at least three times the cost of acquiring the customer. If it takes longer or customers are worth less, then valuation suffers.
This is another situation where finding a hungry, high-demand market and nailing product-market fit are crucial. Bringing weak products into highly saturated markets makes it more difficult to achieve quick times to payback and scale revenue. Operating in the right market and solving for a high-value customer result with exciting products will help you reduce expenses and sales cycle times.
That in turn will help you build higher valuation multiples.
Use the Right Levers for the Job
If you want to build a SaaS business with a high valuation as soon as possible, focus on boosting these metrics, and you’ll increase your valuation if and when you’re ready to raise a funding round. When your company can demonstrate both internal and external growth along with quick capital paybacks, investors will love you.
To learn more about finding product-market fit and scaling revenue quickly, book a call today. We’ll talk about your business and discuss ways to get you more customers while staying profitable.
With the right strategy, a multiple of 20 to 30x is achievable.