What are the details that matter in comparable analysis?

Question

Hi folks - I appreciate your input in advance. I work at a VC firm investing in late-stage pre-IPO SaaS companies. Recently, on our team, we had quite a bit of discussion around how do we select the most appropriate comp set and how do we underwrite the company's future going forward.

Besides the basics of comparable analysis, there were a couple of more nuanced discussions that came up from that topic: 1. How far would you go to include "strategic comparables" in your comparables set. "Strategic" is defined as companies that has a different business model, but would potentially acquire or compete with the subject company in the future. 2. Would you include larger tech companies in your comp set if the large tech (e.g. Google) has similar services as your subject company, but the revenue derived from that segment is very low for the large tech comparable?

Answer 1

In comparable company analysis for late-stage pre-IPO SaaS companies, selecting the most appropriate comp set requires balancing relevance with predictive power, especially in the dynamic SaaS landscape. Beyond the basics—such as aligning on industry, growth stage, revenue size, and business model—nuanced considerations like strategic comparables and the inclusion of larger tech companies demand careful judgment. The comp set should reflect companies with similar financial metrics (e.g., revenue growth, EBITDA margins, ARR multiples) and operational characteristics (e.g., customer base, churn rates, or go-to-market strategies). For SaaS, key metrics like ARR growth, net dollar retention, and Rule of 40 scores are critical, as they signal scalability and efficiency, which are central to valuation. The goal is to select comps that mirror the subject company’s market positioning and growth trajectory to ensure the analysis provides a credible benchmark for underwriting future performance.

Regarding strategic comparables—companies with different business models but potential as acquirers or competitors—their inclusion depends on the investment thesis and the strategic context. If the subject company operates in a niche where future M&A or competitive dynamics are likely (e.g., a SaaS company with unique AI-driven features), including strategic comparables can provide insight into exit valuations or market positioning. However, these should be used sparingly and weighted less heavily than direct comps, as differing business models (e.g., a SaaS company vs. a platform company) can distort financial multiples and mislead underwriting. For instance, a strategic comparable might be included if it’s a potential acquirer with a history of buying similar SaaS businesses, but only as a secondary reference to contextualize the primary comp set. Over-reliance on strategic comps risks diluting the analysis’s precision, so they should be clearly flagged as supplementary.

As for including larger tech companies like Google, which may offer similar services but derive minimal revenue from that segment, caution is warranted. If the service overlap is marginal (e.g., Google’s cloud SaaS offerings are a small fraction of its revenue), their inclusion can skew multiples and misrepresent the subject company’s valuation. Large tech companies often trade at premiums or discounts driven by their broader business, not the specific SaaS segment, making them less relevant. However, if the large tech company’s service is a direct competitor or a growing part of its strategy (e.g., AWS for cloud SaaS), it might be included as a reference point, but only with clear caveats about its limited comparability. For underwriting the company’s future, focus on comps with similar growth profiles and market dynamics, supplemented by scenario analyses (e.g., DCF with varied growth and churn assumptions) to capture the subject company’s unique trajectory while grounding the valuation in market realities.

Answer 2

I was involved in a somewhat similar discussion during a past internship, so I’m by no means an expert, but happy to share what I observed back then. The team I was with took a fairly flexible approach when it came to comps. It wasn’t always just about similar business models but also about who might be relevant from a strategic perspective in the future. Even if the fit wasn’t perfect, those companies sometimes helped frame the bigger picture.

I don’t have direct experience with including large tech players in the comp set, but I would imagine it really depends on how much the segment in question reflects the dynamics of your target company. If it’s a small part of the larger business and not core to how that company operates or is valued, the usefulness of the comparison might be limited. Still, it could provide context in certain situations, especially if there’s overlap in product or go-to-market approach.

That said, I imagine the right approach really depends on what kind of story you're trying to tell or which questions you're trying to answer with the comp set.
Hope this adds something useful to the conversation.