This is a guest article from William Short of Founders Advisors. We hope you enjoy it!

There have been several studies of the public markets and valuation drivers, all of which typically show a strong correlation between EV/Revenue and revenue growth.  In its 2017 Software Outlook, Credit Suisse finds that revenue growth has the strongest correlation to value across all the accounting financial metrics they track and monitor, including operating profits and cashflows. 

Andy Vitus of Scale Venture Partners offers a unique view on the impact growth has on the scalability of recurring revenue businesses in this article. He states, “for any SaaS company to be more than 10x larger five years from now, it must be growing revenue at a CAGR higher than 80% today and the growth rate must decay no faster than the norm.”

In terms of proprietary data, at Founders, we have seen similar valuation trends in our SaaS deals. Below are the results of some of our recent SaaS transactions, and the impact that growth rates have had on each company’s respective revenue multiple.

1. Vertical SaaS Company
   1. YoY Growth Rate: 100%
   2. Net Revenue Retention: >100%
   3. EV/LTM Revenue: 6.5x
2. Vertical SaaS Company
   1. YoY Growth Rate: 30%
   2. Net Revenue Retention: 90%
   3. EV/LTM Revenue: 4.3x
3. Horizontal SaaS Company
   1. YoY Growth Rate: <5%
   2. Net Revenue Retention: <80%
   3. EV/LTM Revenue: 1.8x

Obviously, there are numerous other factors that contributed to the valuations above and they should not be discounted at the sole expense of growing quickly, but growth continues to be perhaps the leading factor determining a SaaS company’s valuation. 

About Founders Advisors

Founders Advisors (Founders) is a merger, acquisition and strategic advisory firm serving lower-middle-market companies. Founders’ focus is on nationwide energy, industrial, SaaS/software, internet, industrial technology, healthcare, digital media, consumer, and value-added distribution companies as well as companies based in the Southeast across a variety of industries. Founders’ skilled professionals, proven expertise, and process-based solutions help companies access growth capital, make acquisitions, and/or prepare for and execute liquidity events to achieve specific financial goals. In order to provide securities-related services discussed herein, certain principals of Founders are licensed with M&A Securities Group, Inc. or Founders M&A Advisory, LLC, both members FINRA & SiPC. M&A Securities Group and Founders are unaffiliated entities. Founders M&A Advisory is a wholly owned subsidiary of Founders.

For more information, visit www.foundersib.com.