SaaS and Valuation Terms Quick Reference

For those new to SaaS business, acronyms and technical terms can be confusing. This quick reference guide explains common SaaS and valuation metrics in a mathematical format for easy understanding.

  1. Some terms come from different fields like accounting, investing, and operations, so there may be subtle differences. This guide aims for developer-friendly understanding rather than strict precision.
  2. Terms are defined when they first appear and not repeated later.

Cost of Capital

  • Rf (Risk-Free Rate): The theoretical rate of return with no default risk, typically represented by long-term government bond yields (e.g., 10-year U.S. Treasury)
  • Rm (Expected Market Return): The market's expected return, represented by annualized returns of market indices (e.g., S&P 500, CSI 300)
  • MRP = Rm - Rf (MRM, Market Risk Premium, ERM): The excess return expected from investing in the market over risk-free assets
  • Beta (β) = Cov(Ri, Rm)/Var(Rm): Measures a stock's volatility relative to the market. β>1 indicates higher sensitivity and risk than the market.
  • Re = Rf + β × MRP (Cost of Equity): Calculated using CAPM. The rate of return shareholders expect for investing in your company and bearing risk. Since they take on β times the market risk, they expect β × MRP in returns.
  • Alpha (α) = Ri - Re: Measures a stock's excess return relative to CAPM. α>0 indicates outperformance versus market benchmark.
  • Rd (Cost of Debt): The company's interest expense on debt.
  • E = P × Shares Outstanding (Market Cap, Equity Value)
    • P (Price): Stock price
    • Shares Outstanding: Total number of outstanding shares
  • D = Total Debt - Cash and Cash Equivalents (Net Debt)
  • EV = E + D (V, Enterprise Value, Total Market Value)
  • WACC = (E/EV) × Re + (D/EV) × Rd × (1 - Tc) (Weighted Average Cost of Capital)
    • Tc (Tax Rate)

Revenue Calculations

  • OpEx (Operating Expenses) = R&D (Research and Development) + S&M (Sales & Marketing) + G&A (General & Administrative) + Other operating expenses (e.g., D&A, Depreciation & Amortization)
  • COGS (Cost of Goods Sold): Direct costs like raw materials, API fees, etc.
  • ARR (Annual Recurring Revenue) = MRR (Monthly Recurring Revenue) × 12
Sales (Revenue) ≈ ARR ≈ Revenue
  - COGS
= Gross Profit
  - OpEx + D&A
= EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
  - D&A
= EBIT (Earnings Before Interest and Taxes) / Operating Profit
  - Interest
= EBT (Earnings Before Taxes)
  × (1 - Tc)
= Net Profit / NOPAT (Net Operating Profit After Taxes)
  ± Cash adjustments (changes in payment terms)
= OCF (Operating Cash Flow)
  - CapEx (Capital Expenditures)
= FCF (Free Cash Flow)
  • EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
  • EBIT (Earnings Before Interest and Taxes)
  • EBT (Earnings Before Taxes)
  • Net Profit
  • NOPAT (Net Operating Profit After Taxes)
  • OCF (Operating Cash Flow)
  • CapEx (Capital Expenditures)
  • FCF (Free Cash Flow)
  • GR YoY (Gross Revenue Year-over-Year) = (Current - Previous) / Previous
    • Current: Current period
    • Previous: Same period last year
  • Gross Margin = Gross Profit / Revenue
  • Net Margin = Net Profit / Revenue
  • FCF Margin = FCF / Revenue
  • EPS (Earnings Per Share) = Net Profit / Shares Outstanding
  • GMV (Gross Merchandise Volume): For e-commerce platforms

Valuation Multiples

  • Book Value = Net Assets = Shareholder's Equity = Owner's Equity
  • BVPS (Book Value Per Share) = Book Value / Shares Outstanding
  • TBV (Tangible Book Value) = Book Value - Intangible Assets
    • Intangible Assets: Patents, trademarks, customer relationships, goodwill, etc.
  • P/B (Price-to-Book Ratio) = P / BVPS = Market Cap / Book Value
  • ROE (Return on Equity) = Net Revenue / Book Value
  • ROA (Return on Assets) = Net Revenue / Total Assets
  • ROIC (Return on Invested Capital) = Net Revenue / Invested Capital
  • EV / Sales (Enterprise Value-to-Sales Multiple)
    • GMV Multiple = EV / GMV
    • ARR Multiple = EV / ARR
  • Enterprise Multiple = EV / EBITDA
    • EV / EBIT
    • EV / FCF
  • P/E (Price-to-Earnings Ratio) = P / EPS = Market Cap / Net Profit
    • TTM P/E (Trailing Twelve Months)
    • Forward P/E (Forward): Expected P/E
  • PEG (Price/Earnings to Growth) = P/E / GR YoY: PEG = 1 is considered fair valuation, meaning the market pays 1x P/E for every 1% of growth
  • P/S (Price-to-Sales Ratio) = Market Cap / Revenue
  • P/CF (Price-to-Cash Flow Ratio) = Market Cap / OCF
  • Earnings Yield = EPS / P = 1 / P/E
  • FCF Yield = FCF / EV
  • Reinvestment Amount = CapEx + ΔWorking Capital - D&A
  • Reinvestment Rate = Reinvestment Amount / Net Profit

Valuation Models

  • Relative Valuation: Compare with peers using P/E, P/B, P/S, etc.
    • Trading Comps (Comparable Company Analysis): Compare with public market peers
    • Deal Comps (Transaction Comparables Analysis)
  • Absolute Valuation
    • DCF (Discounted Cash Flow)
    • LBO (Leveraged Buyout)

We'll only introduce the DCF model:

  • r (Discount Rate, Required Return Rate) = WACC
  • DCFi = FCFi / (1 + r)^i: Present value of free cash flow in year i
  • Perpetual Growth Model: EV = FCF0 × (1 + g) / (r - g)
    • g (Growth Rate)
    • Used to model long-term growth, where long-term growth rate g is less than WACC
  • Two-Stage DCF Model: EV=∑i=1NFCFi(1+r)i+FCFN×(1+g)(r−g)×(1+r)N\text{EV} = \sum_{i=1}^{N} \frac{\text{FCF}_i}{(1 + r)^i} + \frac{\text{FCF}_N \times (1 + g)}{(r - g) \times (1 + r)^N}
    • First N years: High growth phase, calculate and discount each year's FCF
    • Year N+1 onwards: Stable growth phase, use perpetual growth model

Advertising and Marketing Metrics

  • S&M Cost: Sales and Marketing expenses
  • Leads: Potential customers
  • Impressions: Number of times content is displayed
    • Reach: Unique impressions (deduplicated)
    • Frequency = Impressions / Reach
  • Clicks: Number of clicks
  • PV (Page View)
    • UV (Unique Visitor): Deduplicated PV
  • Bounce Rate: Percentage of users who leave after viewing only one page
    • Engagement Rate = 1 - Bounce Rate
  • Conversion: Number of conversions
  • Users: Number of users
  • CTR (Click Through Rate) = Clicks / Impressions
  • CVR (Conversion Rate) = Conversions / Clicks
  • CPM (Cost Per Thousand Impressions) = S&M Cost / Impressions × 1000
  • CPC (Cost Per Click) = S&M Cost / Clicks
  • CPA (Cost Per Action) = S&M Cost / Conversions
    • CPP (Cost Per Purchase) ≈ CPA
  • CAC (Cost Per Acquisition, Customer Acquisition Cost) = S&M Cost / Users
  • CAC Payback Period = CAC / (ARPA × Gross Margin × NRR)
  • AOV (Average Order Value) = Revenue / Conversions
  • ROAS (Return on Advertising Spend) = Revenue / S&M Cost
  • Magic Number = Revenue GR / S&M Cost
  • ARPU (Average Revenue Per User) = Revenue / Users
    • ARPA (Average Revenue Per Account) ≈ ARPU
  • Average Customer Lifetime = 1 / Churn Rate
  • LTV (Lifetime Value, CLTV) = ARPU / Churn Rate: Average profit a customer generates over their entire relationship with the company
  • LTV / CAC: Lifetime Value to Customer Acquisition Cost ratio
  • ACV (Annual Contract Value) = ARR / Users
  • FCV (First Contract Value)
  • TAM (Total Addressable Market) = Potential Customers × ARPU
  • SAM (Serviceable Addressable Market): Limited by geography, channels, technology
  • SOM (Serviceable Obtainable Market): Limited by marketing capabilities
  • NPS (Net Promoter Score)

Common Terms

  • Control Premium: Premium paid for acquiring control
  • GAAP (Generally Accepted Accounting Principles)
  • IFRS (International Financial Reporting Standards)
  • SOHO (Small Office Home Office)
  • SMB (Small and Medium Business)
  • Unicorn: Startup valued over $1 billion
  • Decacorn: Startup valued over $10 billion
  • Hectocorn: Startup valued over $100 billion

SaaS Metrics

  • Efficiency Score = FCF Margin + ARR GR YoY
  • CCS (Cash Conversion Score) = ARR / (Total Capital - Cash)
  • Growth Endurance: Year-over-year retention of growth rate
  • Churn Rate
    • Revenue Churn Rate = Lost Revenue / Beginning Revenue
    • Logo Churn Rate (Customer Churn Rate) = Lost Customers / Beginning Customers
  • Retention Rate = 1 - Churn Rate
  • Gross Retention = (Beginning ARR - Churn - Contraction) / Beginning ARR
    • Churn: User cancellations
    • GRR (Gross Revenue Retention)
    • GDR (Dollar-Based Gross Retention Rate)
    • GLR (Gross Logo Retention)
  • Net Retention = (Renewals + Expansion - Churn - Contraction) / Beginning Revenue
    • Expansion: Existing users increase purchases
    • NRR (Net Revenue Retention Rate)
    • NLR (Net Logo Retention Rate)
  • FTE (Full-Time Equivalent): Converts part-time and contract workers to full-time equivalents
    • R&D FTE Ratio = R&D FTE / Total FTE
    • S&M FTE Ratio = S&M FTE / Total FTE
  • Revenue per FTE = ARR / FTE

SaaS Benchmark Values

Reference: Bessemer

Healthy Metrics Benchmarks

  • North Star Metric: ARR
  • ARR Growth Rate: 60-200%
  • ARR Growth Endurance: 70%
  • GRR: 85%+
  • NRR: 120%+
  • Gross Margin: 65%+
  • Early Stage Margin Structure Average: R&D 95%, S&M 95%, G&A 70%
  • CAC Payback Period: 15-22 months
  • LTV / CAC: >3
  • Magic Number: >1
  • FCF Margin (when ARR > $100M): > -35%
  • Efficiency Score: >40 (Rule of 40)
  • Pre-IPO: >$100M ARR, FCF > 0

Valuation Multiples

  • $1M-10M ARR: EV/ARR=30
  • >$10M ARR: EV/ARR=15
  • Valuations often emphasize long-term cash flow: In 2001, PayPal's future cash flow over the next 10 years contributed 75% of current valuation
  • 2014 - 2019: Golden age, EV/Sales=15-20
  • 2020 - 2021: Pandemic and zero interest rates, EV/ARR=50
  • 2022 - 2023: Interest rate shock, Rule of 40
  • 2024 -: High growth + profitability required

Correlation Between ARR and Growth/Profitability

  • R² (R-squared, Coefficient of Determination): Measures model fit, closer to 1 means better fit
  • Efficiency Score: R² = 0.42
  • GR: R² = 0.34
  • GR with FCF > 15%: R² = 0.74
  • Best Fit
    • 2021: GR : FCF = 6.9
    • 2025: GR : FCF = 2.4