Unlike your seed round funding, you have now developed a track record with an established user base and other key performance metrics you can show for. You also know you have a great product, and you could be generating a monthly recurring revenue (MRR) of approximately $50,000 - $100,000.
In this round of funding, investors are no longer just looking for great ideas. They are now looking for proven ideas that can be turned into a successful business, and eventually a profitable one.
While profitability doesn’t matter as much yet, the investors’ decision becomes more metrics-driven than during the seed phase. It means that your numbers will do the talking for you.
In this phase, your key metrics for valuation are:
The data for your CAC and LTV may not be 100% stable yet, but they will begin to play a role in the valuation of your business in this round. That is why we will focus on your ARR, growth rate, and NRR.
Once you have the numbers for these metrics, you really only need to multiply them along with a multiplier.
To make things simpler, we will use 10 as a multiplier in the following example. This value is a shortcut to do the math for other percentage multipliers. For example, a 40% growth rate is estimated to be worth four times in revenue. In reality, your growth rate dictates your multiplier.
That said, the formula to estimate a SaaS company’s valuation, based on its annual growth rate is:
Multiplier x Annual Recurring Revenue x Annual Growth Percentage x Net Retention Revenue rate = Valuation
Say, if your key metrics are as such:
ARR = $1,200,000
Annual Growth rate = 250%
Net revenue retention rate = 130%
Using a multiplier of 10, your calculations will look like this:
10 x $1,200,000 x 2.5 x 1.3 = $39,000,000
This means that your company is worth $39,000,000.
Now, let’s change things slightly to see how your growth rate affects this calculation. We’ll keep the value of all other variables, but with a growth rate of 150%, your valuation will look like this:
10 x $1,200,000 x 1.5 x 1.3 = $23,400,000
At a growth rate of 150%, your company is worth $23,400,000.
You may think: Hang on, I am bringing in more new recurring revenue. Isn’t that good enough? Let’s take a look.
In this new calculation, we will keep your growth rate at 150% as well as the rest of the variables and double your ARR to $2,400,000. This is how it looks like:
10 x $2,400,000 x 1.5 x 1.3 = $46,800,000
Even with an ARR of $2,400,000 but a growth rate of 150%, your valuation is still lower than when the ARR is only $1,200,000 but the growth rate is 250%.
This simple formula takes into account some key performance metrics investors look for and is well suited to early stage businesses. It shows where your valuation stands without requiring too much data.
At the post-seed or pre-Series A stage, a 15-20% month-over-month growth rate is a good target to aim for. If you have a 30% plus month-over-month growth rate, you are solid!