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:

  1. Account expansion demonstrates initial product market fit. Customers are buying more of the product they trialled.
  2. Account expansion meaningfully reduces the amount of a capital a startup needs to grow.
  3. Customer success reduces customer acquisition costs by fueling word of mouth.
  4. Customer success increases or at least stabilizes the market size, because a business isn’t burning through customers.
  5. At some point in the not too distant future, new bookings from customer success will exceed new bookings from the sales team.
  6. 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.

Sign up to receive these posts by email with 25k+ others