Discuss: Early growth rate predicts which startups are worth 10x more down the line

Photo credit: Jimi Filipovski.

Before you read this, first check what your historical compounded monthly revenue growth rate is.

Got your growth rate figure ready? Let’s continue.

To evaluate an investment opportunity, investors will be looking at all areas of your startup such as business model, addressable market size, team profile, traction, etc. The growth rate, which is under the “Traction” section of your pitch deck, plays a big part in how an investor will evaluate your valuation.

So, the question is how much does growth rate affect your valuation?

Here’s an example:

Assume there are two competing B2B SaaS startups (A and B) with the same monthly revenue of US$10,000 a month but with different historical growth rates. Startup A was able to achieve a 10 percent revenue MoM growth while Startup B achieved 20 percent.

• 10 percent revenue MoM growth for the next 12 months = US$31,000 per month or an annualized revenue of US$400,000 (rounded up for simplicity)
• 20 percent revenue MoM growth for the next 12 months = US$89,000 per month or an annualized revenue of US$1 million (rounded down for simplicity)

Generally, SaaS startup valuations tend to apply a revenue multiple on top of the annualized recurring revenue (ARR). The range of revenue multiples is between two and 10 times and is determined by four core elements:

• Growth rate
• Market size
• Revenue size
• Churn rate

The average revenue multiple is four times, in general.

Let’s get back to the above scenario.

• Startup A, with 10 percent MoM growth and US$400,000 in annual revenue, will multiply with a revenue multiple of four times and have a valuation of US$1.6 million.
• Startup B, with 20 percent MoM growth and US$1 million in annual revenue, will multiply with a revenue multiple of six times and have a valuation of US$6 million.

When both startups raised series A at the same time with 20 percent dilution, Startup A got only US$320,000. Startup B, on the other hand, was able to raise US$1.2 million, which they can spend on scaling up customer acquisition, executing faster technology enhancement, and onboarding more expensive talent.

Let’s discuss: