Seed round SaaS companies are in the early stage and have no strong proven record. Your valuation during this stage is merely a perception of the value the company might create in the future. They don’t identify the actual value of the company because nothing has been created yet.
The capital raised will be used to fuel things such as market research and product development. In this stage, your investors will be mainly looking at your:
- Company traction
- Team expertise
- Prototype or MVP quality
- Market opportunity - Total available market (TAM), market share, market value, international expansion
But that’s not all of it. When raising your seed capital, you are essentially trying to convince investors you have a business with a huge potential for growth and profitability without a lot of evidence to support your pitch.
If you were an investor, would you make an investment in the absence of data? Chances are, you won’t. It is no less different for your investors. The only data-driven way to evaluate your business is to dive into your key metrics for valuation. These are the metrics that matter most in the seed phase:
- Rapidly growing user base - the number of customers using your product.
- Monthly recurring revenue (MRR) - the total monthly amount of your subscription.
- Growth rate - the growth percentage of your MRR or number of users.
Is there a metric that matters more than the others?
Yes—your growth rate. Growth is the main correlation for a seed round valuation, and this can mean both user based growth and revenue growth.
The formula for calculating your growth rate is:
[(Value from current month - value from previous month)/value from previous month] x 100% = growth rate
For example: To calculate the growth rate of your MRR, you need to know:
- Total MRR for last month = $14,000
- Total MRR for this month = $15,500
Therefore, your MRR growth rate is:
[(15,500-14,000)/14,000)] x 100% = 10.7%
As we’ve mentioned at the beginning of this article, the capital raised will be used to fuel things such as market research and product development. But if you already have existing customers to show for, then you are really onto something—which is exactly what investors are looking for.
According to Paul Graham, co-founder of seed capital firm Y Combinator, a good growth rate is 5-7% a week. If you hit 10% a week, then it means you’re doing exceptionally well. However, if you’re only growing at 1% a week, then it’s a sign you haven’t yet figured out what you’re doing.
Calculating value is hard when there is no revenue or if there is very little revenue in the early days. Therefore, it is crucial that you focus on growth rate—both in your user base and MRR.