Navigating the SaaS Crossroads

In my role at saas.group, I've had countless conversations with SaaS founders grappling with a critical decision:

Should they prioritize growth or profitability? Especially in the context of maximizing exit proceeds.

This question has become increasingly relevant in today's economic climate, where investor scrutiny of business fundamentals has intensified.

The Current SaaS Landscape

Recent economic shifts have dramatically altered the SaaS playing field. The era of easy money is behind us, and companies are adapting in various ways:

1. Some (= very few) have successfully cut costs while maintaining decent growth.

2. Others (probably the majority) have reduced expenses to increase their margins but seen their growth stagnate.

3. Many are in a holding pattern - neither growing significantly nor particularly profitable.

If you find yourself in group 3, you should try to get out of it as quickly as possible.

Some acquirers prefer high-growth opportunities, others favor steady cash cows, and some look for a balanced mix of both (we at saas.group are chasing the latter two).

Unfortunately, there is very little interest in companies that are neither growing nor generating profits.

If you are in the Dead Zone or Grey Zone according to the chart below, you should look to move up or to the right.

Otherwise, you risk eroding company value. As you can see below, the public market currently values SaaS companies in the Dead Zone at 2.3x ARR.

You can assume that the private market multiple for your small SaaS is below.

The Crucial Decision Point

For SaaS founders, the key question to ask is:

Can you realistically accelerate growth with your current resources and market positioning?

If the answer is no, it's time to shift focus towards profitability. The good news is that the SaaS model, with its recurring revenue and high gross margins, provides a solid foundation for achieving profitability.

Charting the Path to Profitability

For those choosing to prioritize profitability, consider this approach:

1. Reach breakeven asap (if not yet achieved): This provides breathing room to explore future growth opportunities.

However, be wary of complacency. Lingering too long in a low-growth, break-even state can leave you vulnerable to market shifts and competitive pressures.

2. Aim for healthy margins: I would recommend aiming for a profit margin of at least 10%.

Public SaaS companies with low growth (<10%) and higher profitability (>10%) are currently valued at 4.1x ARR.

That’s +78% vs. Dead Zone!

The Growth Imperative

If you're leaning towards a growth strategy, ensure your plan is:

1. Realistic: Based on concrete data and market analysis, not just your optimism as a founder.

2. Actionable: Supported by successful pilots, early adopters, or proven sales strategies.

3. Financially viable: If additional funding is needed, securing it should be your top priority.

This path is much riskier, but if you can achieve higher growth (>25%) profitably (Rule of 40 >20), you can expect to get a premium valuation.

In the public market, these companies are currently valued at a median ARR multiple of 11.5x.

Conclusion

The current market environment seems unforgiving, but it also offers immense opportunities for those who navigate it wisely.

Whether you choose to prioritize growth or profitability, the key is to make a deliberate choice and execute with precision.

Happy to help you if you want to know how a potential buyer would look at your business. ✌️