🏢 How to Valuate Your Company (Like an Investor)...
2 key methods to accurately value your startup: Learn how to calculate the LTV/CAC ratio and apply it to ARR, providing a clear, objective benchmark for assessing startup value based on financial performance and potential growth.
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Ask any founder how much they think their startup’s worth and you’re likely to get a range of answers that all boil down to the same thing: More. Always more.
But then you chat to investors and do some funding rounds, and they always seem to have a different figure in mind…
Why? Well, for starters, they don’t have any personal or emotional attachment to it, so they need to evaluate it objectively, on merit alone. And that often means finances and execution, not the idea itself. So they look at it as potential multiples of Annual Recurring Revenue (ARR).
And doing the same exercises they do is extremely illuminating for how you should grow your company. Here’s one of our favourites…
Steps to value on the LTV/CAC model
1. Calculate your LTV/CAC ratio
LTV and CAC are north stars for startups. A quick recap:
- Life Time Value (LTV) is the total revenue you get from a single customer, minus servicing cost, over the average duration for which most customers use the product before cancelling.
- Customer Acquisition Cost is the total amount you spent to acquire that customer — think marketing spend, signup costs, etc.
If you take your LTV and divide it by CAC you’ll get your LTV/CAC ratio.
2. Multiply by ARR
According to Dirk Sahlmer from SaaSfyi’s valuation framework, the higher your LTV/CAC ratio, the higher your value scales as a multiple of ARR (annual recurring revenue). Like so:
LTV/CAC ratio
Company Valuation
Lower than 2
Double your ARR
Between 3 and 5
2–2.5 times ARR
Between 5 and 8
2.5–3 times ARR
Between 8 and 10
3+ times ARR
Note: These are international SaaS metrics, so you might have people locally differing from this quite a bit. In reality, very few companies have an LTV/CAC higher than 3 to 5.
But, this should serve less as a valuation tool, and more as some benchmarks for you to be building towards – because every startup needs to generate revenue.
Got a valuation insight or question? Hit reply and let us know…
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