Using Revenue for High-Growth Valuation

For SaaS startups that are not yet profitable because they are investing heavily in growth, using revenue (specifically Annual Recurring Revenue, or ARR) as the basis for valuation is a common and accepted practice.

The Rationale:

• Profitability is a Choice: In many high-growth SaaS businesses, the lack of profit is a deliberate strategic choice. The company is choosing to reinvest all available cash into sales, marketing, and product development to capture market share as quickly as possible.
• Future Earnings Potential: The valuation is based on the assumption that the company could become profitable if it chose to reduce its growth spending. The current revenue is seen as an indicator of future earnings potential.

Key Considerations:

• Growth Must be Proven: A revenue-based valuation is only credible if the company can demonstrate a strong and consistent growth trajectory. The founder must provide evidence (projections, market research, cohort analysis) to back up the claim that the growth is sustainable.
• Higher Risk: This methodology is inherently more speculative than an earnings-based valuation. A buyer is betting on future potential, so the quality of the growth and the underlying business model will be heavily scrutinized.

Using revenue is a key part of The Core Formula for Startup Valuation for companies in a high-growth phase, but it requires a compelling story and strong evidence to justify the multiple applied.