If you’ve followed our recent podcast episodes and articles, you already know how much weight we put on growth for startups looking to raise. This week, I spent some time poking around SaaStr’s valuation calculator (BTW, hats off to SaaStr, super ballsy move for an org run by a VC); it does a great job of putting the relationship between growth and valuation into perspective.
Even beyond the brashness, credit where it’s due. A tool like this enables founders to adjust a handful of business metrics and see how those changes influence valuation. In the early stages of running a startup, it can be hard to understand the lens through which the market approaches valuation. So while a calculator like this can’t account for all possible variations, it does a great job serving founders with an element of context.
No one should be surprised that adjusting the growth numbers in an equation like this dramatically impacts the valuation. In an investment environment where few want to jump on board anything other than the native AI category, founders need to understand what is really driving their valuation and the fundamentals they need to have locked before they try to raise.
Growth Remains Number One
If you can show that your business is delivering value to your customers and growing consistently, you have earned the right to raise money.
Here are some numbers to help put that into context. According to the same SaaStr resource, businesses growing annual recurring revenue (ARR) by 30% or more fall into its high-growth category, while 20-30% is considered moderate, and anything below 20% is slower growth.
Personally, I’d set the bar considerably higher for a young company looking to raise, expecting closer to triple-digit growth. If you’re not doubling or more every year, you’re not going to raise the round that you want. You might not even raise a round at all.
The Relationship Between Your Spend & Your Growth
Of course, the rate at which your ARR is rising doesn’t tell the whole story. How much did it cost you to acquire the customers you have? What’s your customer stability like? Churn likelihood? Net revenue retention (NRR) growth?
All of these numbers matter, and all of them require time. If you have a brand-new solution, you’re not going to be able to provide any of this. You need to give the business time to grow and prove itself, and that time has to be very focused on building strong fundamentals.
That way, when you eventually do go to an investor, you can point to what’s already known and claim an accurate, grounded valuation.
$2 Million is the New $1 Million ARR
The old $1 million milestone is closer to $2 million today because investors are asking young companies to show more proof before assigning the valuations founders once expected earlier.
This is why the only real proxy for success is your customer base. If you can show that there’s a very short line to value-based pricing, or show that customers need you, you have a much stronger story.
It’s not enough to have a solution that would be a “nice-to-have” for customers, something that would generally boost efficiency or something similar. Your solution has to be something they need to have, even at a premium price. If you sell to 1,000 customers, but each product is only $10, that paints a much different picture than if you sell to two customers for $5,000 apiece.
Those two businesses may generate the same revenue, but they tell very different stories about the depth and value of the solution.
Growth as the Primary Value Proposition
One of our portfolio companies has tremendously strong fundamentals. They just had a customer come back who left for a zero-dollar solution because it was provided by their incumbent, and then their results fell off a cliff.
There are few better testaments to customer value and growth than having a customer who went to a solution that checks the same boxes, in theory, and is totally free—but then came back, willing to resume paying five or six figures a year for their solution because the value is so superior.
Growth for the customer is the primary value prop. Customers are using their software because it gets them more customers, writes their contracts, eliminates a major constraint, and allows the business to scale. Savings and efficiency have value, too, and the strongest solutions can draw a straight line to something fundamental to the customer’s ability to grow.
That kind of value should show up in your metrics and in the stories your customers tell. A customer willing to pay $100,000 a year after trying a free alternative gives you a pretty compelling story to take into an investor conversation. It also gives you something worth amplifying if you decide to raise.
Show That You’re Building a Real Business
There are plenty of times when I speak with founders and advise them not to raise money. We’re living in an incredibly attractive environment for taking a product to market with very little expense and very little dedicated time. You don’t need to own servers, employ a huge engineering team, or carry many of the high costs that used to come with getting a software company off the ground.
If you can get to $1 million in revenue, you’ve shown you have a real business. If you can keep growing to $5 million with a rapid growth rate and an efficient operation without taking outside money, even better.
There are no hard lines here, either. Maybe your inflection point happens at $250,000 or $500,000 because the growth rate is rapid and you’ve reached the point where keeping your day job or avoiding a salary is slowing the business down.
The big question is: What would you put that money toward? Your goal is to retain as much equity in the business as possible, so taking capital should be tied to something specific that you already know you can amplify.
I believe the best answer is speed. Maybe you have a market opportunity that could be eroded as other players enter, current competitors catch up, or the category develops around you. Maybe getting more customers onto the platform also gives you ownership of the data and insights that will inform the next set of solutions you build. If additional capital lets you act on that opportunity faster, now there’s a reason to inject money into the business.
I love profitable companies that can stand on their own two feet and choose to raise because they see an opportunity they need to seize. They know where the money is going, they know what is already working, and they can explain why speed is the critical lever to pull right now. The capital gives them the ability to move faster on something the market has already started validating.
Founders should be able to answer the same question before taking a dollar. If your current staff, toolkit, and platform can capture the opportunity at the speed required, you have the option to keep building with what you have. If additional capital materially changes how quickly you can move on demand that’s already there, that’s a strong reason to raise.
Know What the Money Is For
A lot of founders reach the point where the product is ready and immediately start thinking about the money required to get it into customers’ hands. Today’s cost of building makes it possible to learn a tremendous amount before bringing institutional capital into the equation. Get the product into the market, find the customer, concentrate your experiments, and give yourself enough time to establish what’s known.
Then put a flag in the sand. Know what you’re building toward, what your customers are proving, what kind of growth the business can produce, and exactly what additional capital would allow you to do faster. Those answers give you a much better foundation for thinking about valuation and how much money the company really needs.
That’s ultimately where a tool like SaaStr’s calculator becomes useful. It gives founders context for what the market may value and a way to think through where they could raise. The more important decision still belongs to the founder: What would you put that money toward?
If you have a real business, strong growth, customers who depend upon the value you create for them, and an opportunity where speed to market matters, you have something worth amplifying. At that point, capital has a job to do.
