We know that Software-as-a-Service (SaaS) companies with a higher growth rate are much more valuable than other SaaS companies with a lower growth rate, all things equal, based on research of publicly traded companies. When looking at the value of a business internally for the purpose of raising money or selling the business, it’s an interesting exercise to quantify just how valuable growth is to the overall valuation of the business.
Now, making the assumption that gross margins are in the 70% – 80% range, renewal rates are in the 80% – 90% range, and that there’s nothing else abnormal about the business from a SaaS perspective, here’s the proposed formula:
Valuation = (2*ARR) + (ARR*(1+(GRM*GR)))
ARR = Annual Recurring Revenue
GRM = Growth Rate Multiplier = 2.5
GR = Growth Rate
So, if growth rate is 0 (e.g. the company isn’t growing), the company is worth two times revenue, which…
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