Every company with recurring revenues knows that the renewal rate is important. Usually, the VC board member constantly pushes for a higher renewal rate. But, what should be the target renewal rate?
I try to answer this question in two ways.
1) Impact on Revenue Growth. Assuming the same new business growth rate (ie 40%), revenues after 10 years will be just 1x with a 60% renewal rate, 12x with a 89% renewal rate and 23x with a 97% renewal rate. The underlying chart shows the revenue growth tied to various renewal rates assuming a 40% new business growth rate.
2) Impact on the Valuation/Revenue Multiple. Public companies with a 89% renewal rate have revenue multiple of approximately a 3x, while public companies with a 97% renewal rate have a multiple of approximately a 14x.