2 minute read / May 12, 2016 /
The Leading Predictor of Series A Valuation for SaaS Companies
The highest correlated factor to post-money valuations for Series A SaaS companies isn’t revenue or revenue growth, but negative churn. Revenue growth correlates to post-money with a 0.18 R^2. Revenue correlates at 0.3 R^2. Negative churn, or account expansion, correlates at 0.54 R^2.
Initially, I found that result astounding, because all of the public market research and valuation work focuses instead of multiples of revenue. But the more I reflected on it, the more logical it is, especially for an early stage company. Here’s why:
- Account expansion demonstrates initial product market fit. Customers are buying more of the product they trialled.
- Account expansion meaningfully reduces the amount of a capital a startup needs to grow.
- Customer success reduces customer acquisition costs by fueling word of mouth.
- Customer success increases or at least stabilizes the market size, because a business isn’t burning through customers.
- At some point in the not too distant future, new bookings from customer success will exceed new bookings from the sales team.
- If a product satisfies a small group of customers so well that they continue to increase their spend, investors won’t be challenged to believe that there lies a large market of similar customers who will behave identically.
The data underscores why building a great product is the first order of business for a startup and why developing great customer success should be the second order of business. Many founders do this instinctively, and develop a cadre of reference customers.
If you needed one more reason to develop a product, pricing plan and go-to-market with negative net churn, here it is. It’s the best predictor of your valuation when you raise your Series A.