We’ve all basically settled on this being the core SaaS start-up valuation metric.
Back In The Day, VCs and others used multiples of present values, often at a discount to public company multiples.
However, if you are growing at > 100% year-over-year, public company and present revenue multiples don’t really capture the future potential of the startup. There are zero public SaaS companies growing at that rate, though some have come close the year they IPO’d (e.g., Workday).
So while yes, private companies in theory should trade at a discount for illiquidity compared to public comps — if all things were equal. But they aren’t. Because the best startups are growing far, far faster than any public comps.
Using current ARR multiples of 2x on the low-end (slow growers) and 20x on the high-end (outliers) are still good rough rules-of-thumb. But eight-figure ($10m+) Series A/B/C deals are really all done based on a multiple of forward revenues. They’re all based on an estimate of where you’ll be in 12 months, based on your trailing growth rate.
So while the valuations of Slack or Stripe may seem insane, they are justified by equally insane forward growth rates. Not their present revenue multiples.