As you evaluate SaaS Companies it's critically important to understand the 4 Vital Signs of SaaS.
- VITAL SIGN #1: Growth: This is the most critical vital sign. Without growth and a lot of it in ARR you will not see the valuations. Companies earlier grow faster and it becomes harder to maintain growth later in their journey.
- VITAL SIGN #2: Sales Efficiency: SaaS is about Distribution of the product. It's incredibly important that the product gets distributed across and breaks through the noise of the market. This primes for disruption.
- VITAL SIGN #3: Churn: This determines if the customer is getting value of the software. The great thing about SaaS is the customer has to get continual impact of the purchase. This is why one-time negotiations in SaaS are dangerous.
- VITAL SIGN #4: OpEx: This is the burn rate of the company. Without cash, companies can't operate.
It's important to note, Growth, Sales Efficiency, Churn, and OpEx are the Top 4 Metrics for the Recurring Billing Cycle.
These charts by ScaleVP also show you how many VC companies look at their portfolio with respect to potential.