Evaluating the Purity of a SaaS Business

David Cummings on Startups

Recently I was talking to an entrepreneur that has sold his last company and is actively looking for a new business to either start or join. As we got to talking, it became clear that his goal is to get involved with a pure Software-as-a-Service (SaaS), as opposed to a tech-enabled business service where there’s a hybrid between proprietary technology and human-powered services. Some of his drivers for a pure SaaS business include higher valuations at the same revenue levels, greater economies of scale, and perception that there are better opportunities.

Assuming a pure SaaS business is the goal, here are a few financial model considerations to contemplate:

  • Gross margin (especially at scale e.g. > $20mm in revenue)
  • Cost of customer acquisition
  • Lifetime value of the customer
  • Renewal rates
  • Scalable lead generation

The ideal SaaS business will have high gross margins (> 80%), low cost of customer acquisition (< first…

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