SaaS and Valuation Terms Quick Reference

Today

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