Boy I don’t know.
When I started investing in ‘13-’14, there was a basic metric for U.S.-based SaaS companies: 10x ARR after $1m ARR if growing at Top 25% rates (e.g., > 10% MoM at $1m ARR, or > 80-100% YoY at $10m ARR).
The public markets didn’t really support those valuations then, and wouldn’t until ’15 or so. But it was a rough yardstick. And if the start-up was growing quickly enough, it would be OK.
I invested in a bunch of companies at say $15m pre that were at $1.5m in ARR, or something like that.
Fast forward to 2018, and the world is very different:
First, valuations for the hottest SaaS start-ups are much, much higher. Slack, Intercom, and other super-fast growing start-ups raised at much higher multiples. The best just starting growing faster. More here: Coupa, Twilio, and The Acceleration of SaaS | SaaStr. So the hottest companies can raise at $40m, $50m, even $100m pre at $1m ARR. But — they have to have the potential for insane growth (see below).
Second, there are so many angels and new seed funds that sometimes are less valuation sensitive. Many of the 500+ new funds are less valuation sensitive. They just want to get into good deals. For me personally, this is perhaps the biggest “competition” in some sense. If you have a proven team, in a hot space, you can sometimes get a much better seed/late seed deal from folks that are not valuation sensitive.
But third … SaaS start-ups stopped “automatically” getting funded at $1m ARR, growing 10%+ month-over-month. As the best started breaking away with breathtaking growth rates, even growing 15% at $1m ARR wasn’t good enough anymore to automatically get funded.
Start-ups I meet that easily would have gotten funded at $1m ARR in ‘13-’15 … don’t today. They have to go further. One reason is there are just so, so many more SaaS start-ups. So many more.
So it’s confusing today, and perhaps it should be. Investing is investing in the future, not the present. Future growth, future cash flows, etc.
So Slack at $250m pre at $5m ARR or so doesn’t sound crazy today. Because growth was insane.
But now, everyone is looking for outlier growth. Unicorns have become decacorns.
So if you aren’t “hot” and on a traditional path in a traditional space, in SaaS at least … it’s harder.
And valuations may fall because of that … if you aren’t hot. 10x ARR is still pretty darn good if you aren’t an outlier yet. Because that’s still higher than the public comps support.