---
title: "How to Predict the Forward Multiple of a Software Company"
description: "Learn how revenue growth and sales efficiency predict SaaS company valuations, with data from 60 public companies. Get the formula to estimate forward multiples within 20% accuracy."
categories: ["data analysis","SaaS","financials"]
keywords: ["SaaS valuation","forward revenue multiple","Tomasz Tunguz","software company metrics","venture capital","revenue growth","sales efficiency","financial analysis"]
ai_summary: "Discover how revenue growth and sales efficiency predict SaaS company valuations and calculate forward multiples accurately."
date: 2020-09-22
lastmod: 2026-07-28
canonical_url: https://www.tomtunguz.com/correlates-to-forward-multiple/
author: "Tomasz Tunguz"
---

High growth software companies are valued based on forward revenue multiples. In other words, to calculate the enterprise value of a business, you multiply the revenue by the forward multiple. But, how does the market set the multiple? What predicts the forward multiple, or correlates with it?

I pulled together the data for the basket of the roughly 60 publicly traded SaaS companies and ran a linear regression to understand the predictive power of the many key metrics reported by public companies. 

The answer: revenue growth and sales efficiency dominate the model. Cash flow margins, net income margins (profitability), gross margins, and many other metrics are largely irrelevant. 

![image](https://res.cloudinary.com/dzawgnnlr/image/upload/v1600804950/correlates_with_forward_multiple.png)

Revenue growth correlates with forward multiple at 0.81. 

![image](https://res.cloudinary.com/dzawgnnlr/image/upload/v1600829954/correlate_revenue_growth_with_revenue_multiple2.png)


Sales efficiency isn't far behind at 0.75. 

![image](https://res.cloudinary.com/dzawgnnlr/image/upload/v1600807196/correlate_sales_efficiency_with_forward_multiple.png)

If you'd like to predict the forward multiple for the next software company to file their S-1, use this formula.

` Forward Multiple = 6.3 + 38 x Revenue_Growth + 2 x Sales Efficiency `. 

It should get you within 20% of the forward multiple observed in the market today. 

By popular demand, here are definitions:

1. Revenue growth - year over year growth in revenue
2. Gross margin - gross profit divided by revenue
3. Cash flow margins - cash flow from operating activities divided by revenue
4. Net income margin - net income divided by revenue
5. Sales efficiency - (gross_profit_this_year - gross_profit_last_year)/selling_and_marketing_expense_last_year