When investors evaluate a SaaS business, ARR establishes context. But there are two other metrics that have an enormous impact on valuation and outcome.
1. The Rule of 40 Revenue Growth Rate + Free Cash Flow Margin ≥ 40. This single number captures whether a SaaS business has found a sustainable balance between growth and profitability. Companies that consistently score above 40 command significantly higher revenue multiples.
2. CAC to New ARR Ratio Total S&M Spend ÷ New ARR Added. Below 1.5x is excellent. Above 3x signals that growth is being purchased at a cost that is too high.
Both metrics are straightforward to calculate, but founders also need to know what to do when the numbers are off.
A full breakdown — including formulas, benchmarks, and actionable recommendations — is available in the latest video. Link in the comments.
