Free Valuation Calculator: Under the Hood of Our Algorithm

You've clicked the button. You want to know what your startup is worth. But how does a "Free" calculator actually determine the value of your life's work? Is it just a random number generator, or is there real science behind the screen?

Transparency is key in valuation. We believe founders deserve to know exactly how they are being graded. We don't use magic numbers. We use a Comparative Market Analysis (CMA) model, similar to how Zillow values homes but tuned specifically for the nuances of Recurring Revenue businesses.

This article peels back the layers of our algorithm, explaining the specific weights we assign to growth, churn, and profitability, and why certain inputs can swing your valuation by millions of dollars.

What you’ll learn

In this technical breakdown, we cover:

1. The Data Set: Where we get our multiples and how we clean the data.
2. The "Big Three" Drivers: How ARR, Growth, and Churn interact to form your base multiple.
3. The Input Sensitivity: Which single field changes your valuation by 50% (and how to fix it).
4. Limitations: What a calculator can't see (Team, IP, Market Characteristics) and where human intuition is still required.

The Methodology: From Data to Dollars

Our valuation engine runs on a three-step process: Cohort Matching, Base Multiples, and Quality Adjustments.

1. Cohort Matching

First, we bin you into a "Cohort" based on your ARR size. Valuations are not linear; a company with $10M ARR trades at a different meaningful multiple than a company with $100k ARR due to risk profile.

• Micro Cohort (<$1M ARR): These businesses are valued heavily on SDE (Seller Discretionary Earnings) rather than Revenue. The buyer is buying a job or a small cash flow stream. Risk is high.
• Scale Cohort ($1M - $10M ARR): These businesses have proven product-market fit. Valuation shifts to Revenue Multiples. Buyers are strategic or small Private Equity firms.
• Growth Cohort ($10M+ ARR): These are institutional assets. Valuation is driven by Efficiency Metrics (Rule of 40) and competitive moat.

2. The Growth Modifier

Once we have your base cohort multiple (e.g., 4.5x ARR), we look at your Year-over-Year growth rate. Growth is the proxy for future cash flows.

• Hyper-Growth Premium: If you are growing 2x faster than your cohort median (e.g., growing 100% YoY when the median is 40%), we apply a Premium Multiplier of 1.25x to 1.5x.
• Stagnation Discount: If you are flat or shrinking, we apply a Distress Discount (0.6x - 0.8x). Buyers assume a flat SaaS is a dying SaaS because churn will eventually eat the base.

3. The "Quality" Adjustment

This is where Churn and Margin come in. Revenue quality matters as much as revenue quantity.

• Churn Penalty: High Churn (>15% annual) tells us your bucket is leaky. We lower the valuation because the buyer will have to spend massive amounts on marketing just to stay in the same place.
• Margin Bonus: High Gross Margin (>80%) tells us you are efficient. We raise the valuation because every dollar of revenue drops more profit to the bottom line.

Input Sensitivity: What Moves the Needle?

We ran 10,000 simulations to see which variable outcome had the biggest impact on valuation.

1. Retention is King

Reducing annual churn from 20% to 5% increased the average valuation by 42%. This is because low churn implies high Lifetime Value (LTV) and makes growth cheaper.

2. Growth has Diminishing Returns

Increasing growth from 10% to 50% doubled the valuation. However, increasing growth from 100% to 150% only added 20% more value. At a certain point, "crazy growth" looks risky (unsustainable burn) unless margins are maintained.

3. Margins are a Floor, Not a Ceiling

Having bad margins (<60%) destroys value. Having great margins (85%) preserves value but doesn't necessarily created extra multipliers unless paired with growth.

What We Can't Calculate (The "Art" of Valuation)

Algorithms are powerful, but they are blind to the intangible factors that often drive the biggest exits.

1. Founder Vision & Team

Are you Steve Jobs? Or are you a tired solo founder looking for an escape? A strategic buyer often acquires the team (acqui-hire) as much as the code. A calculator cannot value your brain.

2. Code Quality & Tech Stack

Is your tech stack solid Rust/Go/React on AWS, or is it a spaghetti mess of PHP 5.4 on a shared server? Technical Debt is a massive deal-killer during due diligence. A calculator assumes your code works.

3. Strategic Fit

Is Google buying you to prevent Amazon from having you? Or to instantly cross-sell your product to their 1B users? Strategic premiums can range from 10x to 50x revenue, defying all financial logic. No calculator can predict a bidding war.

Examples: The Algorithm in Action

Let's look at three hypothetical companies to see how the math plays out.

Case Study A: The "Steady Eddie"

• Profile: 5-year-old CRM for plumbers.
• ARR: $500k.
• Growth: 10% YoY.
• Churn: 5% (Very Low).
• Result: Valued at ~3.5x ($1.75M).
• Analysis: Safe, defensible, profitable. But without growth, it won't command a VC multiple. Perfect target for a HoldCo.

Case Study B: The "Rocket Ship"

• Profile: AI-powered legal assistant.
• ARR: $500k.
• Growth: 150% YoY.
• Churn: 20% (High).
• Result: Valued at ~10x ($5M).
• Analysis: Investors are paying for the slope of the curve. They assume they can fix the churn later (risky, but common bet).

Case Study C: The "Leaky Bucket"

• Profile: E-commerce widget.
• ARR: $2M.
• Growth: 0% (Flat).
• Churn: 30%.
• Result: Valued at ~1.5x ($3M).
• Analysis: Despite having $2M ARR, this is a distressed asset. The high churn means the business will likely shrink to $1M in two years unless fixed.

Checklist: Before You Click "Calculate"

Trash in, trash out. Use this checklist to ensure your inputs generate a realistic number:

• [ ] Normalize Your ARR: Remove one-time consulting fees, setup fees, or custom development revenue. Only count recurring subscription revenue.
• [ ] Check Your Churn: Ensure you aren't counting "downgrades" as "churn" unless they left entirely. Distinguish between Logo Churn (customers lost) and Net Revenue Churn (dollars lost).
• [ ] Fully Load Your CAC: When calculating profitability, include the salaries of your sales team, not just the Facebook Ad spend.
• [ ] Be Honest: It's tempting to put "Projected Growth" instead of "Actual Growth." Don't. You are only lying to yourself.

FAQ

Q: Is my data safe if I use the calculator? A: Yes. We do not sell your specific data to brokers or buyers. We aggregate inputs anonymously to improve the cohort baselines for everyone.

Q: Can I use this result for a 409A valuation? A: No. A 409A valuation is a formal, legal audit required by the IRS for issuing stock options. This calculator provides a market estimate for educational and strategic planning purposes only.

Q: Why did my valuation go down when I updated my data? A: Market multiples fluctuate. If the public SaaS market (e.g., Salesforce, HubSpot) crashes, private multiples often follow suit with a 3-6 month lag. We update our baselines quarterly.

Q: Does the calculator handle marketplaces or transactional revenue? A: Our primary model is built for B2B SaaS (Recurring). If you have a marketplace (GMV-based take rate), the "Revenue Multiple" logic still applies to your Net Revenue, but the benchmarks might be slightly off.

Valuation Calculator

Related Resources

• Valuation Guide - The theory behind the math.
• Growth Metrics - Understanding the inputs like CAC and LTV.
• Rule of 40 - Balancing growth and profit.