Valuation: what it is and how to value a SaaS company

Valuation is the estimate of what a company is worth at a given moment. It is not a fixed price nor the book value of assets, but a market read of how much someone would pay today for a slice of the business, looking at the revenue it generates, the pace at which it grows and the odds it keeps growing.

In a SaaS, that estimate almost always revolves around recurring revenue. Because revenue repeats month after month, it is predictable, and predictability is exactly what gives the confidence to put a price on the company future. That is why a SaaS valuation is usually expressed as a multiple of ARR, rather than a multiple of profit, as happens in more mature sectors.

The most common shortcut to value a SaaS is to multiply ARR by a number, the so-called multiple. If a company has $10 million ARR and the market pays 6 times revenue, the implied valuation is $60 million. It is simple to calculate, easy to compare across companies, and the math investors do in their head in a first conversation.

• Valuation = ARR x multiple.
• The multiple is not fixed: it varies with the market cycle and with the quality of the business.
• The more predictable and efficient the growth, the higher the multiple the market will pay.

These multiples are not stable over time. In cycles of low rates and optimism they expand; in tightening cycles they compress. Firms like Bessemer track public SaaS multiples precisely because they act as a thermometer for the valuation of private companies, which trade at a discount to that public benchmark.

Two companies with the same ARR can be worth very different amounts, and the difference lives in the multiple. Three forces pull it up or down: growth, retention and efficiency.

• Growth: the faster ARR grows, the more future revenue the buyer is acquiring, and the more they pay for it.
• Retention: a base that does not churn sustains growth without relying only on new sales. According to SaaS Capital, net revenue retention above 100% is among the most valued signals in a private SaaS.
• Efficiency: growing while burning little cash is worth more than growing at any cost.

The Rule of 40 is the established way to synthesize that trade-off: it adds the growth rate to the margin, and the ideal result lands at or above 40. The private SaaS survey by KeyBanc Capital Markets uses metrics of this kind to separate the companies that combine pace and discipline, exactly the ones that capture the highest multiples.

In an investment round, valuation shows up in two forms that cannot be confused. The pre-money is what the company is worth before receiving the investment. The post-money is the pre-money plus the money that came in.

• Post-money = pre-money + investment.
• Example: pre-money of $8 million, investment of $2 million, post-money of $10 million.

The distinction is not a detail: it decides the slice the investor takes. In the example above, the $2 million represent 20% of the post-money, so that is the stake the check buys. Confusing pre with post-money directly changes how much of the business the founder hands over for the same amount.

Valuation is not a vanity trophy: its practical effect is to define how much of the cap table changes hands. The math is direct: the investor slice is the investment divided by the post-money.

• Investor equity = investment / post-money.
• A $2 million investment on a $10 million post-money buys 20% of the company.

Every new round issues shares and re-splits the pie, which reduces the slice of those already in, an effect called dilution. That is why valuation matters so much to the founder: a higher pre-money means handing over less equity for the same money, preserving stake for the rounds to come.

There are two broad logics for arriving at a valuation. The first is the revenue multiple, the shortcut we have seen: fast, market-driven and ideal for high-growth companies that are not yet profitable. The second is discounted cash flow (DCF), which projects the cash the company will generate in the future and brings it to present value.

In practice, DCF needs a stable cash history for the projections to make sense, something most growing SaaS companies do not yet have. That is why the ARR multiple dominates early rounds, while DCF gains weight as the company matures and cash becomes predictable. Good investors look through both lenses: the multiple says what the market pays today, DCF tests whether that price holds over the long run.