Dirk Sahlmer’s Post

We should stop putting startups in two camps: Bootstrapped OR VC-backed. In my experience, founders are often very dogmatic about this. Bootstrappers enjoy their freedom and don't think investors would add any value. VC-backed founders, on the other hand, believe that building a large successful business requires rapid scaling and a lot of external capital. Both groups may be right to some extent. But I think founders should approach this more openly. In the boom times, I saw some bootstrappers going big by raising large rounds of funding (primary and/or secondary investments) ➡️ lemlist Now we see how well-known VC-backed startups are switching to bootstrapping mode to survive ➡️ Pitch It is possible and sometimes needed to change lanes on your journey. That's why I think it would help both camps to talk to each other more. There is a lot to learn. Example: Bootstrappers tend to be stronger on product, while VC-backed startups are better at GTM. Would you agree?

The 20 factors that matter most in private SaaS valuations (according to Software Equity Group):

Founders on LinkedIn after the fire sale of their startup: ❌ "Let me tell you what went wrong and what we learnt from it." ✅ "Let me tell you how I successfully built and exited my startup."

You can play down the Rule of 40, but it still drives today's SaaS valuations! I've read a few articles recently about how the Rule of 40 is losing its relevance. 1️⃣ According to Simon-Kucher's 2023 Global Software Study, 50% of SaaS executives believe that the Rule of 40 is no longer a relevant metric, especially given recent economic headwinds. 2️⃣ An article from Blossom Street Ventures comes to the conclusion that it may be an outdated rule of thumb. 3️⃣ Keybanc Capital Markets' 2023 report shows that only 15% of companies that took part in the survey met or exceeded the Rule of 40. 4️⃣ Benchmarkit shows a median value of 20% in its latest 2024 report. But just because companies are struggling to reach benchmarks doesn't mean they become obsolete. It may be that growth should be weighted higher than profitability for fast-growing scale-ups and publicly traded SaaS companies. That's why Bessemer introduced the Rule of X. But as you can see in the chart I got from Drake Star (thank you, Julian Riedlbauer!), valuations still correlate strongly with the Rule of 40. This is in line with my experience in the private market / at saas.group. If you are able to meet or exceed the Rule of 40, the impact on valuation is significant! And the more you move towards MicroCap M&A, the more important your profit margin becomes. Buyers want to see proof that your business is able to make money. A not-so-scientific LinkedIn poll I recently did found that acquirers want a profit margin that is at least in the single digits, ideally between 10% and 20%.

VCs demonstrating their skills on the Board

Potential Exit Channels for Small SaaS Startups I recently published a post about when the best time to exit is. Takeaway: Don't try to time the market - it will most likely backfire. Now let's clarify the question of who you can potentially sell to. Even if other factors are also important to you as a founder, you probably aim to sell for a decent multiple. To increase your chances of a great exit when the time comes, you should start building relationships with buyers as early as possible. But not every exit channel is suitable for every business, and you should focus on the relevant ones to avoid wasting your time. Founders always dream of an exit to a well-known strategic acquirer for a crazy multiple. The truth is that the odds for small SaaS companies are similar to a lottery (especially if you have horizontal, rather commoditized product). That doesn't mean you shouldn't gamble, but perhaps not bet everything on strategic acquirers. On the other hand, you will probably always find a serial acquirer, roll-up or small PE fund that will buy your business. At a different price, of course (market multiples +-) When you talk to acquirers, you should also know what to pitch them. If Microsoft is interested in acquiring you, you don't need to brag about your Net Dollar Retention. Financially oriented buyers, on the other hand, may not care much about your strong IP if it's not reflected in your SaaS KPIs. If you have a bootstrapped business doing between $1-5M ARR, chances are you will be acquired by one of the two groups in the middle. TL;DR: 1️⃣ Be aware of what relevant exit channels for your business are. 2️⃣ Understand buyers' intentions, so you know what to pitch them. 3️⃣ Start building relationships with buyers today.

If I get the chance to be the dumbest person in the room, I'll take it. Fancy joining us as we talk all things Capital Efficiency in SaaS? 🙂 Reserve your seat in the front row ➡️ https://lnkd.in/e8PtrRj9 Many thanks to the ChartMogul team for organizing these panels - and of course for inviting me to participate in one 🙂 Looking forward to it!

What does it take to raise a Series A in 2024? Check out these SaaS KPI benchmarks from Robert and Harry's session at SaaStr Europe:

Reaction from VC investors when you ask them for concrete advice. Video credit: @\_skillaz

What it takes for a SaaS company to be valued at >5x ARR I don't know why, but many SaaS founders I talk to think that their small SaaS business would be valued at ~5x ARR. They can't justify it, it's just a gut feeling. Unfortunately, those days are over. The current median TTM Revenue Multiple (not ARR!) in the private SaaS market according to Software Equity Group is 3.8x (Q1/24). The average is 5.1x - but less meaningful as it is pulled up by a small number of strategic transactions at very high multiples. Let's take a look at what it takes in the public market to be valued at more than 5x ARR... The Meritech SaaS Index currently shows 13 companies that are valued between 5-6x ARR. Their average numbers: ➡️ ARR: $933M ➡️ Growth (LTM): 17% ➡️ Gross Margin: 76% ➡️ FCF Margin: 14% ➡️ Rule of 40: 31% ➡️ Magic Number: 0.5 ➡️ ACV: $142k ➡️ Net $ Retention: 110% ➡️ ARR/FTE: $391k Given the current market environment, these are pretty good figures for mature SaaS companies with an average ARR of almost $1B. As you can imagine, small SaaS businesses usually need to have better metrics to be valued at a similar multiple. Even if you have similar traction and are <<$10M ARR, you'll probably have to factor in a certain discount. The main valuation drivers have not really changed: 1. Growth 2. Quality of Revenue 3. Efficiency