One More Time: What Drives SaaS Company Valuation? Growth!!

About two years ago, I did a post with a chart from JMP that showed the correlation between the value of a SaaS business and its growth rate.  Today, I’m back with a chart from RBC [1] that shows things haven’t changed.

saas growth

The correlation here is pretty amazing.  What’s even more amazing is that valuation is also closely correlated to customer acquisition cost (CAC) ratio [1].

cac correlation

Because of how RBC defines CAC, a low percentage above equates to a high customer acquisition cost.  That is, 50% above means that the company is getting 50 cents of ARR growth for every $1 of S&M.  Or, in my preferred form, the company is spending $2 for every $1 in new ARR.

Now, if I’m thinking correctly, if thing X and thing Y are each correlated to thing Z, then they are also correlated to each other, which implies that growth rate and CAC are themselves correlated.  I suppose this makes sense because it’s more expensive to grow fast when you spend a lot on customer acquisition, therefore companies that grow more efficiently can also grow faster.

Footnotes

[1] RBC Analysis:  The Economics of SaaS in Public Markets, April 2015.

[2]  RBC defines the CAC upside down relative to the Kellblog CAC — i.e., the RBC definition is ARR growth / prior-quarter S&M expense.

2 responses to “One More Time: What Drives SaaS Company Valuation? Growth!!

  1. This is very interesting data indeed

    I don’t remember a lot of statistics from college but from what I can recollect : If X and Y are both correlated to Z , they could be correlated to each other – but not necessarily with the same correlation coefficient . Will check the theory tonight

  2. What are the current multiples for SaaS companies?

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