Now that you learned a lot of important SaaS & software numbers, let’s talk about how you might use them to value a SaaS company, or estimate how much it’s worth 🕵️

But first, why would you want to estimate how much a SaaS company is worth?

Doesn’t every public company have a market value already?

It can be useful to value companies yourself because you can compare your estimate to their current market value in order to help you decide whether to buy or sell the stock! 📈

There’s no “correct” approach to valuing SaaS companies, but most investors do so by applying a revenue multiple to the company’s TTM revenue.

To determine what number to pick as your Revenue Multiple, you can start with the average SaaS company’s revenue multiple at the current time…

Then bump it up or down based on how well the company performs on key SaaS metrics, like Gross Margins, NRR, churn rate, LTV:CAC ratio, and most importantly, revenue growth rate ⚖️

Imagine you see a SaaS company that did $1B in TTM revenue with 90% Gross Margin, 120% NRR, and 50% annual revenue growth.

These numbers are all really good! 🥳

You’d start at the current market average 6.6x revenue multiple (as of Jan 2024), and perhaps bump it up a few times, maybe all the way to 10-12x because of the company’s great metrics.

With a 12x revenue multiple on $1B in revenue, your valuation would be $12B.

So if the company’s current market cap is a lot lower than $12B, it might be a good investment candidate.

The idea of this approach is to use a SaaS company’s metrics to determine how “good” it is compared to its peers, and then adjust its revenue multiple up or down accordingly.

💡Tip: this approach is only for early-stage SaaS companies that do not have significant profits yet, because there are other more traditional valuation frameworks for mature, profitable companies.