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An inside look into how VCs evaluate SaaS businesses

May 24, 2021
Company Building

SaaS companies are the darlings of the VC world. They deliver the perfect combination of scalability & predictability. As long as the product delivers value for the customer they will keep paying & growth is inevitable. But no model is perfect. SaaS businesses are heavily reliant on future revenue & therefore much more vulnerable if customer churn rates begin to rise. Failing the customer can very quickly lead to a failing business.

When founders submit their numbers they are eager to convince VCs that theirs is a great example of what a SaaS model can offer investors. To position their business as a finely tuned sales machine that offers a service their customers can’t do without. But many times they feel they are looking at a black box. They share their data without knowing how it will be read.

At Jungle we are partners to our founders so we value transparency at every stage in the investment journey. In this article, we will outline the three-part framework that we use to determine the value of SaaS businesses.

Is there a product/market fit in a large enough market?

We take a top-down & bottom-up approach to determining whether there is a sufficiently large addressable market for your business. Naturally, we look first at your ability to attract new businesses and revenue period on period, & the rate at which your Monthly Recurring Revenue (MRR) is growing.

However, these topline figures only paint half the picture. We need to undertake a detailed growth accounting exercise- to understand how valuable the product/service is for your customers. So, we double-click on these figures to interrogate the ‘How?’ & the ‘Who?’.

  1. Firstly, we look at your ability to land & expand, to take existing customers & upsell them. Upselling existing customers is always cheaper than attracting new ones so a great SaaS company has to have this skill in its armoury.
  2. Secondly, we interrogate your churn rate to understand the sustainability of your growth- whether your customers are willing to pay for your product in the long term or if the business is constantly racing to replace its departing customers.

We go deep into the figures at this stage, slicing & dicing the data by customer cohort to really identify for which audiences your services are really delivering.

How well defined is the GTM & can the business scale efficiently?

There is no magic formula but our extensive experience growing SaaS companies puts us in a great position to assess the GTM of any early stage business. We need to be confident that your sales motion is efficient, that you have a good idea of your Ideal Customer Profile (ICP) & that it is in line with your Average Contract Value (ACV) or Average Revenue Per Account (ARPA). An efficient sales machine with a well-defined playbook delivers efficiency & predictability. Music to the ears of every VC.

Firstly we determine how the founders intend to grow the business.

Will it be a sales-led motion, a partner-led motion or product-led growth? This is an important first indicator of what we should expect from a revenue growth & sales cycle perspective.

Secondly, we look at your sales cycle alongside your ACV to get a clear view on the efficiency of your sales motion.

If you have a high ACV ($500k+), as we would expect to see with an Enterprise SaaS business, then a 6 or even 12 month sales cycle is fine. However, if you are achieving a lower ACV we would expect to see an accelerated sales cycle or even a self-serve platform.

A number of other metrics will also be taken into account as we build our assessment. Lifetime Value (LTV), Customer Acquisition Cost (CAC), CAC Payback & the Magic Number, how much revenue you are bringing one quarter versus how much you have spent in the past 2 quarters, are all invaluable. If we are reviewing a later stage SaaS company we might also look at their fundraising efficiency & burn rate to ascertain how smartly they have achieved their current size & AAR.

Finally, we also look at the teams you have built. Building a balanced, skilled sales division with a streamlined process & a slick onboarding strategy is an art form. A big part of Jungle’s value add will be our experience in putting these teams together but any indication that the founders are heading in the right direction is good news.

What is the value of the company today & what could it be worth in the future?

We of course calculate the value of the company today, but the real fun lies in considering the end game. We discuss the exit potential of the business. Who might be the buyers? Is IPO an option? Perhaps most importantly we figure out where we can add value. How would we apply our expertise & our network to help a SaaS business reach its full potential.

So that’s it. Rest assured your numbers will be scrutinised in detail. VCs will look at the big picture & the small flaws. They’ll note where you excel & where there is room for improvement. Hopefully this article has offered a little bit of insight into what VCs like Jungle are looking for & this will help you focus on the right areas in the run up to your next pitch.

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