Getting the valuation of your SaaS business right can make or break once-in-a-lifetime decisions like a company sale or significant capital raise

That’s why it’s essential to understand current valuation practices. Knowing these can help you with: 

  1. Negotiating an acquisition offer: Many potential buyers prefer to lowball in their first offers. Understanding the market environment can provide invaluable insight and ammo for negotiations.
  2. Raising capital: Choosing a to-the-point valuation figure for your next round ensures you don’t undervalue your company or discourage potential investors. 
  3. Understanding your company value: This can help you manage your wealth tied to the business. 
  4. Taking strategic decisions: So that you can maximize company value and understand what metrics drive SaaS valuation in the current cycle.

In this post, we look at the valuations of public SaaS companies and what has driven their impressive boom and bust cycle over the past eight years. We also analyze valuations in M&A transactions to provide better guidance to founders of mid-size SaaS companies.

Table of Contents

I. What Is a SaaS Business?

II. Public Market SaaS Valuations

  1. Our Sample
  2. SaaS Stock Market Performance
  3. SaaS Revenue Multiples
  4. Valuation Drivers: Growth Rates
  5. Valuation Drivers: Profitability
  6. Valuation Drivers: Rule of 40

III. M&A Transactions SaaS Valuations

  1. Our Sample
  2. EV/Revenue and EV/EBITDA Multiples for SaaS Companies
  3. Valuation Drivers: Company Size
  4. SaaS vs On-Premise Software Company Valuations
  5. Public Markets vs M&A Transactions

What is a SaaS Business?

SaaS (Software as a Service) businesses have experienced unprecedented expansion over the past several years and now dominate the software landscape. 

Rapid growth and stock market success made “SaaS” an overused buzzword. Many technology companies chose to label themselves as SaaS to attract investors enamored with the term. Because of this overuse, we think it’s essential to first define what a SaaS company is before analyzing SaaS valuation multiples. 

A true SaaS company ticks these three boxes:

  1. Sells a license to use their software: The core business model should be software licensing, unlike many tech-enabled business models, such as marketplaces or FinTech that primarily generate commissions.
  2. Delivers in the cloud: SaaS should be delivered in the cloud, centrally hosted and managed by the vendor. Software businesses that are in the process of transitioning to the cloud, yet derive most of their revenue from on-premise software, are not considered SaaS businesses in our analysis.
  3. Delivers “as a service”: Customers should pay for the software on a subscription, pay-per-use or pay-per-transaction basis and always have access to the most recent version of the software.

For an overview of valuations across software segments (both SaaS and on-premise), check out our separate analysis.

Read also

AI Valuation Mutliples

Public Market SaaS Valuations

Our Sample

In our analysis, we look at the most liquid SaaS companies listed on top stock exchanges:

  • Companies listed on NASDAQ or NYSE
  • $1B+ market cap as of 13.01.2023

We tried to include fewer companies to focus solely on pure-play SaaS businesses. We therefore excluded companies that: 

  • Generate a significant part of the revenue from on-premise software: SAP, Intuit, Palantir, etc.
  • Generate a significant part of the revenue from resale: Twilio, etc.
  • Generate a significant part of the revenue from commissions on GMV/purchases, e.g. Applovin, The Trade Desk, etc.

We started with a sample of 26 companies in 2015. This grew to 73 companies by the end of 2022 as more went public. As of 30 September 2023, the index includes 68 companies. This is because several of them were taken private by private equity funds while the IPO market remained frozen. In our latest Q1 2024 update, we added the marketing automation company Klaviyo to our listed SaaS companies index.

SaaS Stock Market Performance

SaaS companies have experienced an unprecedented run since 2015. While the post-COVID monetary stimulus certainly provided the final push forward, we’ve seen that the bulk of appreciation happened during a period of stable growth in 2015-2020. 

Our proprietary Aventis SaaS index (consisting of 69 SaaS companies as of February 2024) peaked at more than 700 points (100 = January 1st, 2015) in early 2021, marked by a meme stock mania and SPAC boom. This was also a period of peak IPO activity. 

The Federal Reserve put an end to the bull market in early 2022 and aggressively increased interest rates.

Most SaaS companies we analyzed are currently unprofitable, so they were the ones to feel the pinch as future cash flows suddenly became worth much less. Since its peak, the Aventis SaaS index has decreased by more than 60%.

By the end of H1 2023, the index rebounded significantly, fuelled by the market rally and AI hopes. That said, the rebound was largely driven by established large-cap companies, such as Adobe, Salesforce, Servicenow, while many smaller SaaS players remained stagnant.

With falling investor sentiment, the IPO market virtually froze. Since November 2021, there have been no major SaaS listings, just a couple of take-private deals (Coupa Software, KnowBe4, Momentive). We finally saw a listing of a SaaS company when the email marketing company Klaviyo went public in September 2023.

The Aventis SaaS Index rose 14% between Q3 2023 and Q4 2023. The index is up roughly 3% in the first two months of 2024. (Data as of February 2024)

The index value dropped to 396 in April 2024 from 427 in February 2024. Revenue multiples also declined slightly.

SaaS Revenue Multiples

EV/Revenue is the most common multiple used for SaaS valuation. Since most companies aren’t profitable while they actively invest in growth, profit multiples are not applicable. At the same time, the revenue multiple divided by the target future profit margin can give a ballpark estimate of the future EBITDA multiple. For example, a company trading at 5.0x Revenue that expects to reach a 30% EBITDA margin implies a future 16.7x EV/EBITDA.

The EV/Revenue multiple for our sample of SaaS companies grew slowly for most of the period between 2015 and 2020. This expansion partly drove increases in share prices, but the companies, in parallel, grew their revenue.

The big valuation jump started in April 2020, when the median EV/Revenue multiple increased from a COVID bottom of 9.8x to almost 20.0x, with companies in the 1st percentile valued at above 30.0x. The highest multiple recorded in our sample was Asana, which closed at an incredible 89.0x LTM Revenue on November 9, 2021.

After lingering around 18.0-19.0x for most of 2021, the median revenue multiple started its rapid descent in early 2022, just as monetary policy tightened. By the beginning of 2023, the median revenue multiple declined to 6.7x. It has since rebounded to around 7.8x Revenue at the end of the first half of 2023.

The median EV/Revenue multiple at the end of February 2024 was 7.2x. In Q3 2023 as well the EV/Revenue multiple was .2x, while during the same quarter in 2022, the revenue multiple was 6.7x.

The rise and fall of revenue multiples can be explained by the changing dynamics between the two most important factors determining a valuation: growth and profitability. We take a closer look at both in the following sections.

Valuation Drivers: Growth

Revenue growth has always been a crucial SaaS metric. 

The calculation is simple. If customer lifetime value (LTV) is larger than customer acquisition cost (CAC), keep investing in new customer acquisition. Because profitability will follow at scale, short-term profits are irrelevant, and growth is key.

As in any new industry, the growth rate starts high and then declines as it becomes difficult to increase revenue from a larger base. By Q3 2020, a median SaaS company’s revenue growth slowed to 20% YoY and was on a clear downward path (see chart below).

The growth rates partly explain the massive increase in revenue multiples in 2020-2021. As companies were digitizing during COVID, the median growth rate jumped by 11 percentage points to 31%. This immediately fed through to the revenue multiple, which is sensitive to the growth rate, especially when interest rates are low. 

Yet the jump seemed short-lived as the growth rate returned to its long-term trajectory. Given the higher revenue base and upcoming slowdown, growth can fall even below 15%. The collapse in growth rates is one of the most fundamental factors contributing to the decline in multiples.

As of Q4 2023, a median SaaS company grows its revenue at 17% annually, a figure much below pre-COVID levels.

Valuation Drivers: Profitability

The other part of the SaaS company valuation equation is profitability because cash flow is essentially the most important matter in a company’s valuation. From 2015 to 2019, SaaS companies were on track to profitability with improving EBITDA and net income margins. But these improvements stagnated after 2019 and even declined slightly as early-stage, loss-making companies entered our index. For most of the past three years, a median public SaaS company operated with an 8-14% net loss. During that same time, immediate cash flow generation became less important as interest rates stayed close to zero.

Because of this, increased interest rates were a big blow to public SaaS companies’ valuations. While yields on short-term Treasuries grew to over 5%, valuation multiples for companies with significant losses declined the fastest. 

SaaS profitability

With this change in the economic environment, SaaS businesses are now adapting to the new paradigm. Many have laid off staff, implemented a hiring freeze, decreased investments, and aggressively cut operating expenses. 

The most exposed companies have high burn rates compared to their cash balance. With the IPO market frozen and debt getting increasingly expensive, many businesses need to break-even as soon as possible to stay afloat.

As of Q1 2023, only 23 firms in our sample of 69 were profitable on a Net Income level, and 30 were profitable on an EBITDA level. Those that were profitable had a median revenue multiple of 7.8x, compared with 6.7x for unprofitable companies. 

Let’s take Descartes, a vendor of SaaS logistics software as an example. They traded at 13.7x revenue while generating a healthy 40% EBITDA margin. The company was relatively immune from the tech sell-off, with its share price declining less than 10% from the peak in November 2021.

By Q3 2023 we observed a massive change as compared to Q1 2023. SaaS profitability margins advanced toward positive territory in the last two quarters. Companies in the Aventis SaaS Index touched an all-time high median EBITDA margin at +4%, while the median net income margin indicated a break-even level at 0%.

In Q1 2024 (data as of February 2024), we see that the median EBITDA margin for SaaS has reached a new all-time high of 7%. This shows profitability is becoming a major focus for SaaS, and if the trend continues, we will soon see that SaaS will break even before the end of 2024. Currently, the median net profit margin stands at -1%.

Valuation Drivers: Rule of 40

The Rule of 40 is calculated as a sum of the company’s growth rate and profitability. As the argument goes, SaaS companies can easily choose between revenue and growth, so fast growth compensates for low profitability and vice versa. A healthy SaaS company is supposed to score above 40 on this metric.

As of January 2023, revenue growth decelerated for most companies. This slowdown wasn’t compensated by the increase in profit margin. Only a few companies exceeded the Rule of 40 with a comfortable margin (e.g., Adobe, Descartes, and EngageSmart).

While the Rule of 40 is a valuable rule of thumb to assess a company’s operational efficiency, it also correlates with SaaS business valuation. We see a slight upward-sloping trendline, suggesting that a 10% increase in the Rule of 40 score corresponds to about 1.4x growth in revenue multiple.

SaaS Rule of 40 Vs Revenue Multiple

SaaS Valuations in M&A Transactions

Our Sample

In our analysis of M&A transactions, we looked at 1,000+ software deals since 2015 and marked the ones where the target company is considered to be operating a SaaS business model. 

Over the past nine years, 398 SaaS transactions had a disclosed revenue multiple, and 151 transactions had a disclosed EBITDA valuation multiple.

EV/Revenue and EV/EBITDA Multiples for SaaS Companies

Despite the public markets’ gyrations, revenue multiples in M&A transactions stayed stable. At the same time, EBITDA multiples rose significantly. This suggests that investors paid the same revenue multiple for companies that had a decrease in profitability over time. This corresponds with the analysis of public companies, where there was a slight downward trend in profitability since 2018.

Between 2015-2024, a median SaaS company was valued at around 5.0x Revenue. That said, a quarter of companies were sold at valuations above 9.1x Revenue.

While the 2020-2021 period brought about a massive boom in the public markets, the median valuation multiple in M&A deals grew only slightly from 5.8x to 6.4x. By 2023, it declined back to 3.3x, in line with figures from the previous period.

The year 2020 saw a high figure for the 3rd quartile, suggesting a big jump in multiples in the top 25% of deals. Most deals were still happening at more reasonable valuations, however.

Although rarely used and disclosed for SaaS company valuations, EBITDA multiples stayed above 20.0x since 2019 for businesses that generated positive EBITDA. The median even grew to 29.1x by 2022.

Many SaaS metrics account for the significant differences in company valuations. Highly valued SaaS firms usually operate in a larger total addressable market, have low churn, high net revenue retention, and efficiently use customer acquisition channels. The most important factor in predicting company valuations, however, is deal size. We describe this below. 

Valuation Drivers: Company Size

Deal size is one of the most important determinants of the valuation multiple. In our sample, the median revenue multiple was almost twice as high for deal sizes in the $50-100M basket as compared to the $20-50M basket.

There may be several factors contributing to this large difference:

  1. Many larger M&A transactions involve targets from the public market. This means buyers need to pay a premium to delist the company from the stock exchange. 
  2. A lot of the larger deals are highly strategic, with buyers tending to pay a premium to acquire companies that may be synergistic with their own products. For example, recent acquisitions of Slack by Salesforce, Figma by Adobe (the regulators called off the acquisition), Mailchimp by Intuit, etc.
  3. Larger companies typically operate in larger total addressable markets with ample growth potential, while many smaller software businesses are local and difficult to scale (e.g. cloud accounting software in European countries).
  4. A larger transaction size opens up a larger base of potential investors. Many top private equity funds with low cost of capital have a strict minimum investment size in their mandates.

SaaS vs On-Premise Software Company Valuations

In our analysis, we compared the valuations of businesses operating a SaaS model with non-SaaS businesses (on-premise software, API/SDK, software components, etc.).

Between 2015-2020, the valuation premium of SaaS over non-SaaS businesses was significant at more than 40%. But as valuations of non-SaaS software drove to a median of 5.3x Revenue in 2021, the premium declined as well. In the first half of 2023, valuations for SaaS companies continued to slide. The sample for non-SaaS companies was too small to reach a definite conclusion on the median valuation. 

We believe the unprecedented volume of capital on the market made investors look into less crowded segments of the software industry. The amount of investors looking for lucrative SaaS deals just didn’t match the number of strong companies out there. The wave of interest in on-premise software companies may have also increased valuations in this segment.

In addition, on-premise software companies are gradually accelerating their cloud migration efforts and changing their pricing strategies. This makes them resemble SaaS companies more and more.

Public Markets vs M&A Transactions

After enjoying significant overvaluation during most of the past five years, SaaS valuations in public markets declined so much by the end of 2022 that they nearly converged with valuations in M&A transactions.

2024 SaaS M&A Outlook

  • As we step into 2024, we believe SaaS deals will again return to the market, but with a relatively muted excitement compared to the 2020-21 boom period. The focus will remain on a clear path to profitability for SaaS companies, and valuation multiples will continue reverting to their long-term averages.
  • Artificial Intelligence is expected to remain in focus. While SaaS companies have already started leveraging the integration of OpenAI’s ChatGPT into their products, this may not be a standalone reason to unlock a valuation premium. Instead, SaaS companies with proprietary or in-house AI integrations will command higher premiums, reflecting the market’s growing appetite for advanced technology stacks and adapting to newer trends.
  • Contrary to concerns that emerging themes like Generative AI might overshadow traditional SaaS, we think that both will coexist and complement each other in 2024 to drive synergy potential. Put simply, SaaS will ‘not’ take a backseat or be forgotten by VCs and strategic investors as AI becomes all the rage.
  • A lower interest rate environment is indicated by the Federal Reserve in 2024 as it hinted towards three rate cuts by the end of the year. This should give some breathing space for valuations as financing becomes a bit cheaper.
  • We observed a clear trend of accelerated growth in SaaS profitability margins in 2023, and that is expected to continue in 2024.
  • Vertical SaaS solutions will likely generate more M&A interest than their horizontal peers. This trend aligns with the growing demand for tailored SaaS solutions that address industry-specific challenges and requirements.

About Aventis Advisors

Aventis Advisors is an M&A advisor focusing on technology and growth companies. We believe the world would be better off with fewer (but better quality) M&A deals done at the right moment for the company and its owners. Our goal is to provide honest, insight-driven advice, clearly laying out all the options for our clients – including the one to keep the status quo.

Get in touch with us to discuss how much your business could be worth and how the process looks.