SaaS/Cloud Valuations is the simplest model we have in determining the value of a SaaS or cloud computing company. It only uses 2 variables:
- Revenue Growth
- EV to Sales
Unlike the Rule of 40, this model does not take into account Free Cash Flow (FCF) margins. This can be both a benefit and a drawback. It is a benefit because its focus on growth could reveal companies early in their growth phases that will become very profitable once they gain market share.
This can be a drawback if a company is growing inefficiently. That is, they invest heavily on acquiring customers that will never become profitable enough. This situation can become apparent when the company's attrition rate is too high, causing annual recurring revenue (ARR) to grow too slow in comparison to customer acquisition costs (CAC).
There is also a happy medium between the SaaS/Cloud Valuations model and the Rule of 40. The Rule of X is a variation of the Rule of 40 that applies more weight to growth than profitability. Similar to the Rule of 40, the Rule of X takes profit margins into account. Our Rule of X page allows you to adjust the growth rate multiplier (has a default value of 2).
