Table of Contents
Now in its tenth year, SaaS Capital released its private company benchmark survey. Unless there is survey data (like what SaaS Capital has), it’s harder to find market comps to value a private business. In other words, just because you’re competing with Klaviyo doesn’t mean its eleven times revenue valuation applies to you.
Notwithstanding the inherent limitations of self-reported survey data, the statistical sampling and intellectual rigor that the SaaS Capital team puts into their work is self-evident. The most powerful line from the report:
Acknowledging our bias as a lender, we consider the engine (the company’s business model and product-market fit) as far more important than the type of fuel (the capital). Pouring VC “rocket fuel” into a rocket may work fine – but it won’t transform a Ferrari (or a Honda) into a spaceship.
Retention (with Upsell) Is All You Need
Hubspot Cofounder Dharmesh Shah coined “Retention is All You Need”—a play on the title of the GenAI paper that invented the technology underpinnings of the current AI boom. The pun is that for a SaaS company to have enduring growth you need a strong retention game. I would add that you also need to show a top-notch upsell game—i.e., not only strong renewals but also when it comes to renewal time, a healthy upgrade cycle.
As I’ve said before, Net Revenue Retention (NRR), more than Gross Revenue Retention (GRR), remains the single best predictor of healthy growth rates. From my 2022 discussion on the matter:
The best repeat customer is the one who upgrades at the time of renewal. At the point when there was no contractual obligation to do so, this customer not only stayed but ended up asking for more.
Also from the report, numbers that support the thesis:
Increasing Net Revenue Retention (NRR) from the 90% to 100% range to the 100% to 110% range improves growth rate by 10 percentage points.
And if you need a refresher of the relationship between NRR and GRR, Cube Software CEO Christina Ross recommends the following rubric:
Finally
The report confirms that private money, much like the stock market, values growth that is both responsible and sustainable. However, what investors (and lenders) are watching are the sources of the growth and the underlying untapped levers in the business. From my 2022 discussion:
But when times are tough, blind panic can masquerade as aggressive opportunism. You can overspend on a marketing initiative or make aggressive media buys to try to generate interest without knowing (or fixing) the underlying issues in the business. Be aggressive, but not without understanding the boundaries and limitations of the business.
There are a lot of opinions (usually negative) about debt providers. I suggest a pragmatic take. You don’t know what’s around the corner in life or in business, so raise the capital when you can, how you can, and when you least need it. And then, be parsimonious, judicious, and disciplined about how you spend that cash. Oh, and protect your cap table.