Growing into your valuation: three scenarios you should walk through

Miguel Fernandez
Miguel Fernandez
Co-founder & CEO
Posted on
October 25, 2022
min read
Growing into your valuation: three scenarios you should walk through

Over the past months, I’ve talked to hundreds of SaaS founders and there’s one recurring topic: the current funding environment. How do you address this tough situation? Do you cut costs or do you make a risky decision to keep spending and attempt to grow into the original valuation?

In this article I share advice on how you can use Capchase to keep your business growing over the next 6 - 12 months and on track for long-term success.

First let’s cover the basics - to get to a valuation we need a valuation multiple and ARR at the time of the round. And how do you get to the final ARR at the time of the round? Final ARR = initial ARR + ARR increase. What are the different levers that impact your ARR increase? ARR increase = round size (cash in hand) / burn multiple. So a company can either increase cash in hand or decrease burn multiple.

Let’s take an example of Company A that we have recently seen at Capchase. Company A raised a $25 million Series B on $10 million ARR at a post money valuation of $300 million, implying a 30x revenue multiple.

Since then, multiples have compressed three times, and comparable companies secure term sheets at 8-12x revenues. If Company A were to raise money now, it would have a much lower valuation. So to grow into its $300 million valuation, the company needs to over deliver and grow 3x faster.

This company is now facing a predicament: do they grow faster, burn more money, and have a shorter runway, or do they grow more slowly and cut costs at the risk of having a down round in the next fundraise?

Scenario 1: Grow

Assuming Company A continues with its growth plan and has a burn multiple of 1.6, it would raise money at $26m ARR, or roughly ~$260m valuation: a down round.

To raise the next round at a slight markup, for example at a $350m valuation, Company A needs an ARR of $35m given the 10x valuation multiple and the ARR needs to increase $25m. With the burn multiple of 1.6, it needs an investment of $40m. Company A had raised $25m, and now needs $15m extra cash over the next few years or it will be staring at a down round.

Scenario 2: Cut costs

On the flipside, what could Company A do to cut costs and extend its runway?

By cutting costs, the company reduces its burn multiple from 1.6 to to 1.3. However, a reduced burn rate means slower ARR growth, making it tricky to grow into a $300m valuation by the next fundraise. Cutting costs also affects team morale and investor engagement.

As shown above, it’s hard to grow into valuations by doubling down on growth or cutting costs. At the next round, the company will need to resort to a down round. Investors coming into down rounds are resorting to heavily structured term sheets, which can be highly dilutive.

To avoid this situation, there’s a third option.

Scenario 3: Combine current round with non-dilutive capital from Capchase

In the original scenario, Company A needs ~$40m to keep growing with their 1.6 revenue multiple while spending around 49.5% of its revenue, or 35.03% of its spend on sales and marketing. The extra $15m needed to hit targets and raise a better round represents 43% of the company's exit ARR that can be funded with non-dilutive capital.

Through Capchase, SaaS companies can access non-dilutive capital and get between 30-60% of their ARR to fund predictable activities like user acquisition and growth. In this case, the company uses non-dilutive capital to grow without making its runway shorter.

The example shows how Capchase can help you by funding predictable expenditures that are needed to unlock the next stage of growth. In the current market, this means that we can help you get closer to upping your valuation and boosting company morale, acting as an ally for both you and your investors.