Valuation Multiple
A ratio (like revenue multiple) used to estimate a company's worth relative to a financial metric.
Definition
A valuation multiple is a ratio that compares a company's value to a financial metric such as revenue, ARR, or EBITDA. For SaaS startups, the most common is the ARR multiple (enterprise value divided by annual recurring revenue). Multiples vary widely based on growth rate, profitability, market conditions, and sector. High-growth SaaS companies might trade at 15-30x ARR, while slower-growth companies trade at 5-10x.
Why it matters
Your company's valuation multiple determines how revenue growth translates into equity value. If the market compresses multiples (as happened in 2022), your company's valuation can drop even if revenue grows.
Example
Your company has $20M ARR and was valued at 25x ($500M) in 2021. Market multiples compressed to 10x, making the company worth $200M despite growing ARR to $25M. Your options lost paper value.