Valuing a New Software Business: A Comprehensive Guide

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Valuing a New Software Business: A Comprehensive Guide (Or, How to Pretend You Know What You’re Doing)

Let’s begin with the premise: valuing a new software business is a bit like trying to price an invisible horse at an auction where all the bidders are blindfolded and half of them are still mad they bought Theranos stock. You can nod, wear a smart blazer, and talk about “recurring revenue models” all you want—but deep down, you know everyone’s guessing.

Still, we do it. We must. Because investors need a number to put on a slide deck. Founders want to know if their ten thousand Slack hours are worth something. And consultants need something to charge $450 an hour for.

So here it is—a very serious (but not too serious) guide to valuing a new software business.

Why We Pretend to Know What a Software Business Is Worth

Let’s be clear: this is not just for fun. People stake their livelihoods, reputations, and questionable WeWork leases on this number. So whether you’re a founder in Patagonia fleece or an investor with Patagonia fleece (but more Patagonia), here’s why this exercise matters:

1. Investment Theater

Investors don’t back companies; they back spreadsheets disguised as companies. A clean, rational valuation helps them believe your startup will one day stop burning cash like a pyromaniac with a grudge.

2. Strategic Delusions

Knowing your company’s value can guide you toward glorious scaling strategies or, more likely, toward cutting your espresso machine budget. It’s about planning—because someone on your board has to look like a grown-up.

3. Capital Allocation (aka Who Gets the Money)

Valuation determines where to funnel resources. Product? Marketing? Paying back your cousin who loaned you $5k to build the MVP? All very important questions.

The Unique Challenges of Valuing Software Companies

📦 No Boxes, Just Code

Unlike a bakery or a car dealership, software companies are mostly… air. There’s no physical inventory. Just some code, a lot of hope, and a Figma file.

⏱ Everything Changes Every Six Minutes

One day, you’re the next Salesforce. The next, there’s a Chrome extension doing the same thing for free. Software evolves fast. Your valuation should too, but often doesn’t.

📈 Scaling Is Simultaneously Easy and Impossible

Investors love that software “scales,” which is true in the same way that you “could” run a marathon. It’s possible. But have you actually tried?

So yes, valuing a new software business is hard—but that doesn’t stop anyone from trying.

How Valuation Impacts Everything (Even Your Self-Esteem)

💸 Funding

An accurate valuation attracts investors like flies to a compost bin. Too high, and they flee. Too low, and you’ll raise capital by handing over 30% of your company and naming rights to your dog.

🤝 Mergers and Acquisitions

If you get acquired (congrats), valuation is the opening line of the prenup. It sets expectations, determines if you’ll walk away rich, or just slightly less in debt.

📊 Long-Term Growth

When you know your value, you can set realistic targets. Or, at the very least, you can fake them with conviction.

Market Trends: Because Everyone Loves a Hype Curve

SaaS Is the New Religion

By 2026, the SaaS market is expected to hit $307.3 billion. That’s a lot of dashboards. Companies with recurring revenue and subscription models are the golden children. Even if no one actually logs in after month three.

Specialization Is Sexy

Healthcare SaaS? FinTech SaaS? Goat-farming ERP systems? The more niche, the better. Investors love a focus. Broad = “confused.” Niche = “visionary.”

Remote Work Tools Are Still a Thing

Zoom, Slack, Asana… anything that made it easier to not wear pants during business hours saw their valuations skyrocket. Just saying.

The Main Ways We Pretend to Value a Software Business

🧾 Seller’s Discretionary Earnings (SDE)

Used by smaller companies where the founder still handles customer support and updates the privacy policy manually.

Pros: Transparent, simple, makes you feel like you’re running a lemonade stand with a MacBook.

Cons: Doesn’t scale well. Often makes growing companies look like underachievers.

🧮 EBITDA

For when you want to sound impressive at dinner parties.

Pros: Clean, standardized, strips out noise.

Cons: Ignores things like capital expenditures and human suffering.

💰 Revenue Multiples

The lazy genius’s favorite. Take your annual revenue, multiply it by a number you found on Twitter, and boom—valuation.

Pros: Fast. Easy. VC-approved.

Cons: That multiple is doing a lot of heavy lifting.

The Key Metrics That Actually Matter (Until They Don’t)

ARR (Annual Recurring Revenue)

Predictable income is sexy. $1M in ARR is like a software company’s first real mustache—awkward, but promising.

CAC (Customer Acquisition Cost)

If it costs $5 to make $1, you’re not building a business. You’re laundering investor money.

CLV (Customer Lifetime Value)

Tells you how much each customer is worth. The higher, the better—unless they call support every day, in which case it should go down.

Churn

Losing customers faster than you can gain them? Congratulations, you’re a gym.

Burn Rate

The speed at which your business eats money. If your burn rate is higher than your ARR, sleep with one eye open.

Intellectual Property: It’s Not Just a Patent. It’s a Lifestyle.

Got proprietary tech? A unique algorithm? A UX so beautiful it makes grown designers cry?

Good. That might be the only thing standing between you and total irrelevance.

Patents, Trademarks, Copyrights

They’re not glamorous, but they do make you harder to copy. At least legally.

Competitive Moats

Anything that keeps competitors out and keeps customers in (besides guilt) adds value.

The Future (or, How to Pretend You Have One)

TAM/SAM/SOM: The Holy Trinity

  • TAM: Total fantasy

  • SAM: Somewhat grounded

  • SOM: The part of the market you can realistically reach without crying

Scalability

Theoretically, your app can serve a million users. Practically, it crashes at 27. Investors care about both.

Valuation Multiples: Where the Magic Happens

What They Are

A number (3x, 5x, 10x) you multiply by your revenue to get a valuation.

What Influences Them

  • Growth rate

  • Profitability

  • Market position

  • Vibes (yes, vibes)

Examples

  • A high-growth startup might get 8x ARR.

  • A niche player with loyal customers might get 6x.

  • You, if your pitch deck uses Comic Sans, will get 1x. Maybe.

Five Ways to Increase Your Valuation (Without Crying in the Breakroom)

  1. Keep Customers Churn is not charming.

  2. Innovate, but Don’t Overthink No one needs a blockchain-powered task list for pet ferrets.

  3. Cut the Bloat Do you really need six PMs for one product?

  4. Build a Brand That Doesn’t Make People Yawn If your homepage uses the phrase “synergize your potential,” start over.

  5. Partner Up Strategic alliances = more users = more revenue = better valuation math.

Final Thoughts on Valuing a New Software Business

Look, valuing a new software business isn’t an exact science. It’s improv comedy with spreadsheets. But if you:

  • Understand your numbers,

  • Know your market,

  • Avoid the urge to rebrand every three months,

…you’re already ahead of the game.

Just remember: every number you put out there tells a story. Make sure it’s a good one. Ideally, one with a happy ending—and a big check.

Need help putting a number on your brilliant chaos? Insivia specializes in valuing a new software business—minus the guesswork and with only moderate existential dread.

[Schedule your consultation →]

Andy Halko, Author

Written by: Andy Halko, CEO & Founder

I started Insivia in 2002 and for over 22 years I have had the chance to work directly with hundreds of companies and founders to redefine or reinvent their businesses.