Understanding Key Valuation Drivers in Growth Equity for B2B SaaS

Many B2B SaaS founders guess at their company’s valuation or rely on vague benchmarks from Twitter threads and anecdotal advice. But when it comes time to raise a round or consider an exit, understanding what actually drives valuation in growth equity markets can make all the difference.

• How do investors assess risk vs. growth potential?
• What metrics matter most (and which are overrated)?
• How can you structure your business today to maximize its value tomorrow?

Join us for a live expert session with Einar Vollset, co-founder and General Partner at TinySeed, where he’s helped fund over 200 early-stage SaaS companies and advised dozens through follow-on rounds and exits.

Einar will unpack the real valuation drivers in B2B SaaS — especially for companies outside Silicon Valley hype cycles — and walk you through the frameworks investors use to evaluate your business.

Introduction

• Einar co-founded TinySeed and Discretion Capital.
• Discretion Capital specializes in sell-side M&A for B2B SaaS companies with revenues between $2M and $25M ARR.
• Their deal mix: ~20% strategic buyers (Fortune 500, public companies), ~80% private equity buyers.
• Above $100M ARR, strategic buyers tend to increase.

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Quantitative Metrics

ARR Growth Rate (5 stars importance)

• Most crucial valuation metric for SaaS companies.
• High growth signals market fit and reduces risk for buyers.
• Negative impact if ARR growth is below 25%; strong discontinuity at this point.
• Above 50% growth is very positive; above 100% may cause buyer skepticism but is highly advantageous.
• Buy-side focus is typically on Annual ARR growth over trailing 12 months.
• Revenue growth excludes transactional/one-time payments; only subscription ARR counts positively.

Gross Revenue Retention (GRR) (5 stars)

• Measures recurring revenue retained from existing customers (excludes upsells).
• 95%+ GRR is excellent; below 70% is worrisome.
• High GRR indicates customer "stickiness" and reduces churn risk.

Net Revenue Retention (NRR) (5 stars)

• Includes upsells/expansions; NRR can exceed 100%.
• Buyers prefer >105% NRR; under 85% is often disqualifying.
• Demonstrates ability to grow existing customer revenue.

EBITDA Margin (4 stars)

• Indicates operational efficiency and profitability.
• Positive EBITDA generally favors a higher valuation.
• Buyers prefer businesses at least breaking even or with clear path to profitability.
• Contrast to venture capital view where some see profitability as limiting growth.
• EBITDA = Earnings before interest, taxes, depreciation, and amortization.
• Rule of 40 discussed but presenter skeptical about its practicality in real-world valuation.

Gross Margin

• SaaS businesses usually have very high gross margins (after direct customer costs).
• Below 60% gross margin is a red flag.
• Gross margin issues could arise from licensing, hosting, or manual service costs.

LTV:CAC Ratio (4 stars)

• Ratio of customer lifetime value vs customer acquisition cost.
• Below 2 is negative; above 10 is positive.
• Important for measuring efficiency of sales and marketing expenditure.

Magic Number

• Measures how new ARR compares to prior sales and marketing spend.
• Above 0.75 indicates good payback; above 1 means excellent.
• Helps determine when to invest aggressively in sales/marketing.
• Includes time element unlike LTV:CAC.

Customer Concentration

• Percentage of ARR from top 10 customers.
• High concentration is risky; buyers apply discounts.
• Long-term contracts or high switching costs can mitigate this risk.
• Watch for "change of control" clauses in large contracts.

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Qualitative Metrics

Revenue Model

• Pure subscription/ARR revenue is ideal.
• One-time license sales reduce valuation.
• Mixed transactional models (e.g., pay-per-use services like SMS) are less valuable.
• Encouraged to move towards subscription models for higher multiples.

Type of SaaS:

• Horizontal SaaS (broad use, e.g., e-signature) tends to have lower switching costs and higher churn.
• Vertical SaaS (specialized, industry-specific, e.g., dental software) tends to have higher stickiness and valuation.
• Multi-vertical solutions fall in between.

Delivery Model

• On-premise software has negative impact due to complexity and costs.
• Pure SaaS is preferred.
• Hybrid setups (dedicated servers) have mixed effects, often require higher pricing.

Market Dynamics

• Upstream buyer activity matters (mostly private equity interested).
• Niches like crypto, porn, gambling, B2C SaaS often have poor buyer interest and lower multiples.
• High buyer demand niches (e.g., vertical SaaS in healthcare, dental, gyms) command higher multiples.
• Market trends impact growth potential and investment interest.

Enterprise Sales Readiness

• Ability to sell to larger enterprises boosts valuation.
• Buyers value proven enterprise sales efforts (sales development reps, pipeline management).
• Pure self-serve or low-touch SaaS may limit buyer options and multiples.

Customer Satisfaction / NPS

• NPS above 70 is positive; below 30 negative.
• Even low churn with low NPS is risky due to forced customer retention.

Team & Key Person Risk

• Heavy founder-dependent businesses suffer valuation penalties.
• Investors look for strong teams and succession risk management.
• Experienced sales and operational teams are preferred, especially for scaling.

Growth Potential

• High growth markets and low competition improve valuation.
• Saturated or no-growth markets reduce value.