consumption / usage based SaaS valuations

Based on the most helpful WSO content, here are some insights into valuing SaaS companies, including those that bill on a per-use or consumption basis:

Valuation Metrics for SaaS Companies:

1. Revenue Multiples:

   • SaaS companies, especially those not yet profitable, are often valued on revenue multiples rather than EBITDA.
   • High-growth SaaS companies can command higher revenue multiples, particularly if they show strong ARR (Annual Recurring Revenue) growth.

2. Key Metrics:

   • LTV/CAC Ratios: Lifetime Value to Customer Acquisition Cost ratio.
   • Net Retention Rates: Measures the percentage of recurring revenue retained from existing customers.
   • Churn Rates: The rate at which customers stop subscribing to the service.
   • Bookings and Billings: Bookings refer to the total value of contracts signed, while billings are the actual invoiced amounts.
   • Gross/Net Retention Rate: Gross retention is essentially renewals, while net retention includes expansions and upsells.

3. Valuation Multiples:

   • For high-quality SaaS businesses with strong growth and retention metrics, EBITDA multiples can be as high as 20x.
   • Revenue multiples can vary widely but are often in the range of 5x to 10x, depending on growth rates and market position.

Example:

• A SaaS company with $100 million in revenue, 100% net customer retention, and a 15% growth rate might be valued at 20x EBITDA if it has an 80% gross margin and a 20% EBITDA margin.

Additional Considerations:

• Operating Expenses: Significant costs for SaaS companies often include Sales & Marketing (S&M) and Research & Development (R&D).
• Deferred Revenue: For companies with long-term contracts, billings may be higher than recognized revenue due to deferred revenue accounting.

For more detailed metrics and valuation frameworks, you can refer to the following links: - https://a16z.com/2015/08/21/16-metrics/</a">16 Metrics - https://a16z.com/2015/09/23/16-more-metrics/</a">16 More Metrics

These resources provide comprehensive insights into the specific metrics and valuation approaches for SaaS companies.

Sources: PE recruiting technical questions (software specific), Q&A: Technology IB Analyst, Beginners Guide to Valuation and Metrics By Sector, L/S SaaS Modeling, An Overview of Technology Media and Telecom (TMT) - Part 2 of 2