SaaS metrics are easy to manipulate, hard to verify, and often disconnected from underlying technology reality. Here's what technical due diligence reveals that financial metrics hide.
When Metrics Mislead
A SaaS company looks great on paper: $5M ARR, 120% net revenue retention, 30% growth. The multiples suggest a $40M+ valuation.
But technical diligence reveals:
- The platform can't handle 2x current load without major re-architecture
- High retention is because customers are locked in by data, not value
- Infrastructure costs are growing faster than revenue
- The "platform" is actually 50 customer-specific deployments
Same metrics, very different investment reality.
Metric-Reality Disconnects
ARR Quality
Not all ARR is created equal:
- Multi-tenant vs. single-tenant: Single-tenant "SaaS" has fundamentally different economics
- Professional services dependency: If customers need heavy implementation, true SaaS margins don't apply
- Contract concentration: A few large contracts create revenue risk
- Contract terms: Annual commitments vs. monthly creates different stickiness
Retention Reality
High retention can mask problems:
- Data lock-in: Customers stay because leaving is painful, not because they're satisfied
- Contractual lock-in: Long-term contracts defer churn, they don't prevent it
- Hidden churn: Customers reducing usage but maintaining subscriptions
- Expansion vs. new logos: Growth from existing customers may not be repeatable
Growth Sustainability
Current growth doesn't guarantee future growth:
- Technical ceiling: Platform may not scale to serve larger customers
- Feature debt: Roadmap may be consumed by catch-up, not innovation
- Team capacity: Can the team actually deliver the projected growth?
Technical Indicators of SaaS Health
Architecture Scalability
- Can the system handle 10x current load?
- Is scaling horizontal (efficient) or vertical (expensive)?
- Are there architectural bottlenecks that will require re-engineering?
Operational Efficiency
- What's the infrastructure cost per customer?
- How much manual work is required for customer onboarding?
- What's the support burden per customer?
Product Velocity
- How quickly can new features be shipped?
- What percentage of engineering time goes to maintenance vs. new development?
- Is the technology stack supporting or hindering velocity?
Technical Debt Load
- How much of the roadmap is remediation vs. new value?
- Are there known issues being deferred?
- What's the test coverage and code quality?
The Unit Economics Reality Check
Technical diligence should validate unit economics:
- True CAC: Include implementation and customization costs, not just sales and marketing
- True COGS: Include infrastructure, support, and customer success at actual cost, not allocated
- Marginal customer cost: What does it actually cost to add one more customer?
- Scale economics: Do costs decrease with scale, or increase?
Case Study: The Single-Tenant "SaaS"
An acquirer targeted a vertical SaaS company with impressive metrics: $8M ARR, 95% retention, 35% growth. Valuation expectation: $80M+.
Technical diligence revealed:
- Each of 50 customers had their own deployment
- Customization for each customer averaged $100K
- Infrastructure cost per customer: $2K/month (not $200)
- Upgrades required touching 50 separate environments
- Support was reactive to each environment's unique issues
This wasn't SaaS—it was hosted software. The gross margins were 40%, not the 75% SaaS multiples assume. The realistic valuation: $35-40M, not $80M.