Even when the market is repricing and falling, key growth metrics remain fundamental targets to maintain or grow company value because they remain highly correlated to higher valuations, even in this market. While valuation multiples in public markets have dropped dramatically over the past 6 months, the Magic Number (of Sales and Marketing Efficiency), Revenue Growth, and Rule of 40 still align well to top quartile multiples. And because the Magic Number and Revenue Growth Rate don’t differentiate between whether new growth is coming from new customer acquisition or customer expansion and renewal business, it may not seem truly reflective of the health of the business. Yet, it is important to track Magic Number in conjunction with underlying or contributing KPIs like the CAC or expansion CAC, the CAC payback period, and Net Dollar Retention Rate. These are metrics that every management team should also be watching and analyzing.
OPEXEngine looked at 32 public Cloud companies under $1B to see how their current Market Cap to current TTM revenues tracked against:
- Magic Number
- Revenue growth rates
- EBITDA
- Rule of 40
Valuations are still pegged to top-level growth metrics, balanced by operating profitability. Top performers had high Magic Numbers, high growth rates, and less negative EBITDA margins, resulting in better Rule of 40 results. The opposite was true for the bottom quartile for current market cap to revenue multiples.
We tend to see the same picture emerge for private SaaS company valuations. Private company valuations aren’t as transparent as public ones and are affected by a multitude of external factors, such as relationships, the strength of the management team, belief in future market or technology opportunities, etc. But generally, these same KPIs, Magic Number, Revenue Growth, and EBITDA, track to private SaaS valuations as well. And especially for private companies looking at both cash burn and runway in times when additional funding may be difficult to raise, it is helpful to add Gross Margin to the Magic Number to understand the contribution made by your Sales and Marketing investments.
High-level KPIs like the Magic Number, Revenue or ARR Growth Rate, and EBITDA tell you at the highest level if your sales and marketing are driving growth, and simply help align management, the board, and investors on where to focus attention and resources. Alignment among stakeholders in these times is critical. Then management can dig into the operational metrics like the CAC ratio, Blended, and Expansion CAC which provide a more specific indicator of the underlying problems.
In times of unpredictable and dynamic economic conditions, it is always critical to benchmark against current trends as well as peers and market leaders. High-performing companies maintain a commitment to this approach.
