Need for ARR-based valuation amid unicorn ‘hype,’ says BVP report

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Chennai: The Software as a Service (SaaS) landscape has seen a surge in the number of unicorns but some of the valuations have seen a ‘hype’ that would eventually force a return to business fundamentals such as great products, bolstering customer service and efficient go-to-market methods, according to a report by venture capital firm Bessemer Venture Partners.

SaaS metric – Annual Recurring Revenue (ARR) – is the right yardstick for business success, the report says, underscoring $100 million ARR as an inflection point in a SaaS company’s journey.

“At $100-m ARR, Centaur [denoting a new breed of firms having crossed $100-m revenue milestones] businesses have product-market fit, scalable go-to-market strategy, and a growing customer base,” as per the report.

Bessemer is bolstering its India presence with a $220-million fund announced in November last year. Among Bessemer’s successful SaaS exits is Atlassian, the Australian project management software vendor with a market capitalization of $47.8 billion on Nasdaq.

Anant Vidur Puri, partner at Bessemer, said the term “unicorn” has deviated significantly from its original coinage.

“If you look at where the public cloud multiples were 10 years ago, it was 10-11 times ARR [valuing a SaaS company based on revenue], but last year it was much higher. This had companies with $20-30 m ARR valued as unicorns,” Puri said.

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He added that there was nothing wrong with operating at that revenue bracket but measuring startup success would be more reliable if it were based on actual revenues.

SaaS entrepreneurs agreed there was a need to redouble focus on fundamentals like building a great product and customer service, but strongly disagreed with terming it “hyped” valuations.

“Entrepreneurs need to, anyway, go back to basics in terms of building great products, get paying customers and make enough gross margins and grow. These haven’t changed,” said Suresh

, founder-CEO of Kissflow and co-founder of SaaS community SaaSBOOMi. “Seasoned entrepreneurs do this anyway. If an entrepreneur is offered a 20x multiples against 10x, what’s wrong in taking that? What is wrong is assessing a company purely on valuation. A combination of first-principle metrics and valuations would be right,” he said.

SaaS companies, by nature, have robust business fundamentals: strong revenue visibility, unit economics and predictable costs of customer acquisitions hold them in good stead, he said, adding that higher valuations should also be viewed in the context of “a few good companies being chased by a higher number of investors.”

Recently, venture capital firm Chiratae Ventures and management consultancy Zinnov put out a report that said Indian SaaS startups would grow at a Compounded Annual Growth Rate (CAGR) of 55-70% this year to mop up $116 billion in revenues.

According to the report, the Indian SaaS landscape is expected to see the birth of more unicorns – or those startups with a valuation of $1 billion or more – given the reduced time taken for a startup to reach unicorn status in recent years.

This year, the report said, investments into Indian SaaS firms would reach $6.5 billion, from $4 billion in 2021.

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