Software-as-a-Service businesses can create highly scalable, recurring revenue models, but not every pound of Annual Recurring Revenue carries the same value. Retention, margins, customer acquisition costs, growth efficiency and the route to profitability all influence how investors and acquirers assess a SaaS company.
Published in October 2024, this whitepaper examines the change in SaaS valuations following the pandemic-era technology boom. It considers the differences between public and private company valuations and provides operating benchmarks against which SaaS owners and investors can assess business performance.
The SaaS market experienced a significant rise in valuations during the pandemic. Online services expanded rapidly and SaaS transactions were taking place at an average of approximately 16 times revenue.
Valuations then fell sharply during late 2021 and early 2022 as investor sentiment changed and the exceptional conditions created by lockdowns began to unwind.
The whitepaper separates the development of the SaaS market into three broad periods:
The unusually high multiples achieved during the pandemic should therefore be considered separately from the valuation environment that followed.
Company valuations are ordinarily based on the value of their expected future cash flows. Annual Recurring Revenue can act as a proxy for those future cash flows because a well-performing SaaS business has the potential to generate predictable, high-margin income.
The rationale behind using ARR includes:
However, ARR alone does not establish value. The quality and durability of the underlying revenue are critical.
A business needs to demonstrate that customers will remain with the platform, that revenue can be retained at attractive margins and that growth will eventually convert into profit and cash generation.
The global SaaS market was forecast to reach US$680 billion by 2030, representing a compound annual growth rate of 18.7%.
The UK SaaS market was expected to grow at a compound annual rate of 21% between 2024 and 2029, reaching a market volume of approximately £33 billion.
The UK’s level of IT expenditure and established technology ecosystem created opportunities for agile mid-market and emerging providers. Businesses could develop specialist products without necessarily competing directly with the largest global B2B or consumer software companies.
SaaS products were also being used to increase productivity and reduce operating costs across different industries. In financial services, for example, regulatory technology platforms were automating aspects of compliance and reducing the need for dedicated manual processes.
Excitement around the integration of artificial intelligence had renewed investor interest in software businesses.
The potential benefits identified included:
AI was not presented as a substitute for proven SaaS economics. Investors still needed to understand how product enhancements would translate into retention, efficiency, revenue and profit.
SaaS Capital’s index of publicly listed companies showed a median ARR multiple of 6.2 times in 2024.
This was substantially below the levels reached during the pandemic but remained above the multiples associated with the sector’s earlier development.
The public SaaS sector was also maturing. Growth among larger listed companies was slowing, and the market had not yet consolidated to the same extent as the broader technology industry.
This could encourage established SaaS companies to pursue acquisitions as a route to additional growth, following a pattern previously seen in other maturing technology sectors.
The whitepaper identifies a consistent valuation difference between listed SaaS companies with market capitalisations above and below US$1 billion.
Larger businesses generally attracted higher revenue multiples than smaller listed companies. Scale can influence valuation through factors such as market position, financial resilience, liquidity and the perceived risk attached to future performance.
Public company multiples can provide useful context for private businesses, particularly because many listed software companies are active acquirers. However, they do not provide a direct valuation for a privately owned SaaS business.
In 2024, private US SaaS businesses were generally trading at a discount of approximately 40% to their listed equivalents.
Several factors can contribute to this difference, including:
The wider economic environment also influences the size of the private-company discount. Public market multiples should therefore be used as one part of a broader valuation assessment.
SaaS transaction volumes declined as the wider investment market weakened, although activity in the sector appeared to have been slightly less affected than dealmaking across all industries.
Approximately 90% of the global SaaS transactions considered in the whitepaper were funded by venture capital.
Venture-capital-backed SaaS deals declined by:
The reduction followed difficult conditions for venture capital, including fewer successful exits and a number of unsuccessful initial public offerings.
Despite the slowdown, the UK remained the most developed SaaS economy in Europe. London’s financial sector, universities and technology community continued to provide founders with access to talent, funding and other resources.
ARR had previously been the predominant SaaS valuation measure because many younger software companies experienced significant upfront customer acquisition and research and development costs.
This often meant that accounting profitability lagged behind the commercial progress of the business.
As SaaS companies matured and produced more operating data, investors were able to assess their performance in greater detail. Profitability and the path towards cash generation therefore carried more weight in 2024 than they had five years earlier.
A credible valuation increasingly depended on demonstrating:
The emphasis had shifted from growth at almost any cost towards higher-quality, profitably focused growth.
Recurring revenue only supports a premium valuation when it is sufficiently dependable.
A strong SaaS model allows new revenue to build on previously won customers rather than repeatedly replacing income lost through churn. This creates the potential for revenue growth to feed through to profit at a high incremental margin.
Investors and acquirers therefore need to understand:
Strong retention reduces the perceived risk attached to future forecasts and can support a higher valuation.
Appropriate growth expectations depend on the size and maturity of the company.
The 2024 whitepaper presents the following median ARR growth benchmarks:
The threshold for entering the top-performing quartile also varied significantly by scale. A company with approximately US$1 million of ARR needed growth of at least 106%, while a business with more than US$20 million of ARR entered the top quartile at approximately 35% growth.
These figures demonstrate why a growth rate should not be assessed without considering company size and maturity.
ARR per employee measures how efficiently a SaaS business uses its workforce to generate recurring revenue.
The measure would generally be expected to improve as a company scales, reflecting the high-margin and potentially efficient nature of a mature SaaS model.
Investors can use ARR per employee to understand whether:
A low figure is not necessarily unexpected for an early-stage company investing in products and sales. The trend as the company grows is particularly important.
Burn multiple measures the amount of cash consumed to generate additional ARR. It is calculated by dividing net cash outflow by net new ARR.
As a broad 2024 benchmark:
The metric helps investors distinguish between companies growing efficiently and those consuming disproportionate amounts of capital to achieve expansion.
Customer acquisition measures help investors understand the cost and likely return associated with winning new customers.
The CAC payback period measures how many months a customer must remain with the company before the gross profit generated covers the initial acquisition cost.
Expectations vary according to Annual Contract Value. Higher-value software contracts can involve longer and more expensive sales processes, so an appropriate payback period depends on the type of customer and product being sold.
The new customer CAC ratio measures the expenditure required to acquire £1 of new ARR.
Like the payback period, the ratio generally varies with contract value. More complex and higher-value products may require greater expenditure on sales and implementation.
Comparing customer acquisition cost with Customer Lifetime Value helps demonstrate whether the future revenue and profit expected from a customer justify the cost of winning them.
Together, these measures provide evidence of the business’s potential future profitability and cash generation.
Average sector multiples and comparable transactions can provide a useful reference point, but they do not capture the underlying differences between individual SaaS companies.
Two businesses with similar ARR may have very different:
A reliable valuation therefore requires detailed analysis of the components supporting the recurring revenue rather than applying a headline multiple in isolation.
The 2024 valuation environment rewarded businesses able to connect recurring revenue growth with retention, efficiency and future profitability.
For SaaS owners considering investment, fundraising or an eventual exit, the principal areas of focus included:
The strongest valuation case is built from connected evidence. Growth, retention, margins and customer economics need to support the same account of how the business will create future cash flow.
SaaS valuations often use ARR or revenue multiples, but these measures are supported by analysis of retention, margins, growth, customer acquisition costs and future profitability. The underlying objective remains to assess the value of expected future cash flows.
The SaaS Capital public company index showed a median ARR multiple of 6.2 times in 2024.
Private US SaaS businesses were generally trading at a discount of approximately 40% to listed market equivalents in 2024.
Recurring revenue can provide visibility over future income. Its value depends on whether customers remain with the business, the margins generated and the cost of acquiring and supporting them.
Growth expectations varied by scale. Median ARR growth ranged from 59% for businesses below US$1 million of ARR to 22% for companies with more than US$20 million.
ARR per employee measures the recurring revenue generated for each employee. It can indicate whether a SaaS company is creating operational leverage as it grows.
The whitepaper identifies a range of 1 to 2 as a broad investor expectation. A result below 1 could distinguish the business positively, while a result above 2 could raise concern.
CAC payback is the number of months required for the contribution generated by a customer to recover the original cost of acquiring that customer.
Their retention, growth, margins, churn, customer acquisition costs, contract values and profit potential may differ considerably. ARR provides only the starting point for assessing value.
A business can strengthen its case by demonstrating durable recurring revenue, strong retention, efficient customer acquisition, controlled cash consumption and a credible route from growth to profit.
