Wondering what your SaaS company is worth? Whether you’re fundraising, planning an exit, or mapping growth, valuation is the starting point.
While many founders default to revenue multiples, those alone miss the bigger picture. Investors want to understand the health and future potential of your business, not just its current size.
This guide walks through four key metrics that influence early-stage SaaS valuations and offers a simple formula to help you quickly estimate and understand what truly drives value in your business.
Annual Recurring Revenue (ARR) is the predictable revenue your company generates from subscription licenses over a 12-month period. For any subscription business, ARR is the North Star.
Why investors care:
Investors pay premium multiples for predictable revenue because it reduces their risk and makes your business easier to model and value. Unlike one-time sales, recurring revenue gives investors confidence that your business has a solid foundation and predictable cash flow.
How to Calculate ARR:
A basic way to find your ARR is to multiply your Monthly Recurring Revenue (MRR) by 12.
ARR = Monthly Recurring Revenue (MRR) x 12
When calculating your MRR, include revenue from all active subscriptions, including upgrades and recurring add-ons. Exclude one-time fees like setup or consulting charges, as they aren't "recurring."
ARR Benchmarks by Stage:
An ARR based valuation for SaaS is common because it directly reflects your company's ability to consistently generate revenue.
Growth is the single most powerful driver of your valuation multiple, especially for companies in the early and growth stages. A company growing at 100% year-over-year is fundamentally different from one growing at 20%, even if they have the same ARR.
Why investors care:
Fast growth signals strong market demand, effective execution, and a large addressable market. It tells investors that your company is capturing market share and has the potential for massive returns.
How does growth rate affect SaaS valuation?
Your growth rate should be viewed in the context of your company's size. It’s easier for a $1M ARR company to double its revenue than it is for a $20M ARR company.
According to the OpenView 2023 SaaS Benchmarks Report, top-performing private SaaS companies show impressive growth:
If your growth outpaces the median for your ARR bracket, you can expect a higher valuation multiple.
Net Revenue Retention (NRR) measures how your revenue from existing customers grows or shrinks over time. It answers a critical question: Could your company grow even if you stopped acquiring new customers?
Why investors care:
A high NRR reduces risk. It shows your growth isn't solely dependent on expensive new customer acquisition, making your business more efficient and scalable.
How to Calculate NRR:
NRR accounts for revenue expansion from upgrades (upsells and cross-sells) and subtracts revenue loss from downgrades and cancellations (churn).
NRR = (Starting MRR + Expansion MRR - Downgrades - Churn) / Starting MRR
Where "Starting MRR" is the MRR from a cohort of customers at the beginning of the period.
An NRR over 100% is the gold standard. It means revenue expansion from your existing customers exceeds revenue contraction from downgrades and cancellations.
NRR Benchmarks:
A best-in-class NRR for SaaS is often cited as 120% or higher. This is a powerful indicator of a sticky product, happy customers, and strong product-market fit. It proves your product essentially sells itself.
Gross margin reveals how much profit your company makes from each sale before accounting for operating expenses. It shows the core profitability of your product and your ability to scale efficiently.
Why investors care:
A higher gross margin means you have more cash left over from each dollar of revenue. You can reinvest that cash into product development, sales, and marketing to accelerate growth.
How to Calculate Gross Margin:
Gross Margin = (Revenue - Cost of Goods Sold) / Revenue
For a SaaS company, the "Cost of Goods Sold" (COGS) typically includes expenses directly tied to delivering your service, such as hosting costs, third-party software licenses, and customer support salaries.
Gross Margin Benchmarks:
Healthy SaaS gross margins often fall between 70% and 85%. If your margins are in this range or higher, it signals a strong, scalable business model that investors will value.
Before applying any valuation formula, watch out for these deal-breakers:
Once you have these four metrics, you can use a simple formula to get a back-of-the-napkin estimate of your company's value. This is not a perfect science, but it’s a helpful starting point for discussions.
Valuation Estimate = 10 x ARR x Growth Rate x Net Revenue Retention
This formula begins with a baseline ARR multiple (10x) and adjusts it based on your growth and retention performance. It works best for companies with 50%+ growth rates and 100%+ NRR. For slower-growing companies, expect a lower baseline multiple.
Example:
A SaaS company has $3M in ARR, is growing at 80% per year, and has an NRR of 115% (1.15).
This estimate should then be viewed through the lens of your gross margin. If your gross margin is above the 75-80% benchmark, you might argue for a premium. If it’s lower, expect the multiple to be adjusted downward. Remember, other factors like your team, market size, and the LTV:CAC ratio also influence the final number.
1. What’s more important for an early stage SaaS valuation: growth or profitability?
For most early-stage SaaS companies, investors prioritize aggressive growth over immediate profitability. High growth demonstrates market validation and the potential for category leadership. Profitability becomes a greater focus as a company matures and growth naturally slows. The ideal scenario is efficient growth, where you can scale quickly without burning excessive capital.
2. Should I use venture debt to fund growth if I'm at $2M ARR?
Venture debt can be a smart, non- or minimally dilutive way to fund growth if used correctly. It's less dilutive than equity, meaning you keep more of your company. The risk comes from the loan covenants and repayment obligations. If your company misses its growth targets and revenue falters, making debt payments can become a serious burden. It’s best suited for companies with predictable ARR and a clear use for the capital, like expanding the sales team or funding a specific marketing campaign.
3. How do market conditions affect my SaaS valuation multiple?
Market conditions have a major impact. In strong economic times with low interest rates, investor appetite for risk is high, and SaaS multiples tend to expand. In a downturn or with rising interest rates, investors become more cautious. They may prioritize profitability and capital efficiency over pure growth, causing valuation multiples to contract across the board. It’s critical to know the current market benchmarks when heading into any funding or M&A discussion.
