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What is a reasonable valuation for a niche SAAS company doing $2m in ARR, growing at 40% a year? The profit last year was only $350k due to reinvestment.

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JASON LEMKIN

Probably about $1m.

I know that sounds odd, awful, and strange, but let me explain.

A SaaS company will not be interesting to VCs if:

  • It’s growing much < 10% MoM up to $1m ARR
  • It’s growing much less than 100% YoY from $1m-$8m ARR
  • It’s growing much less than 80% YoY from $8m-$30m ARR or so
  • It’s growing much less than 60% YoY at $30m ARR
  • It’s growing much less than 40% YoY at $80m ARR

These are rough yardsticks for where traditional VCs will be interested. Less than this, than even with upgrades to the team, spending more, etc. … even with a little hope, you won’t be in the zone of a SaaS company that can IPO.

Sometimes, VCs will still invest below these yardsticks. But not too much below.

Now VCs aren’t everything. That’s for sure. But they are the most common source of “valuation setting” out there.

There are more and more “private equity” buyers of established SaaS companies with significant cash flow, e.g. $15-$20m+ ARR, with cash flows usually of $3m+ a year. Private Equity firms will buy these for decent multiples.

And corporate acquirers sometimes are a little less sensitive to growth if you have a strong product in a space they want to enter. Here, you have a 99.5% retention rate — so your product is good, or at least, makes your customers happy. Here in M&A a buyer might pay up to 5x for something good, but that isn’t a rocketship. E.g., $10m.

But unless you are bigger, or have special interest to an acquirer who wants to enter the space … then the only buyers are folks that look at cash.

At $350k cash a year, and a 3–5x cash multiple … you’re worth $1m.

That’s not worth it.

So you’re gonna need to grow into something bigger and better. Which will take time. Probably, a lot of time.

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Published on April 4, 2017
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