My colleagues at River Cities Capital Funds, a Cincinnati and Raleigh based growth-stage venture capital fund with deep expertise in the SaaS technology industry, has recently published a terrific new report with a treasure trove of operating and valuation benchmarking data in the SaaS space. The report was based on studying the financial reports of 92 publicly-traded SaaS companies, to see how those companies grew over time. For purposes of this blog post, I focused on the operating metrics only, to help give earlier stage entrepreneurs a blueprint on how to grow their businesses.
THE KEY DATA
To simplify reading the full 30 page report, I curated the most-relevant median financial metrics for the 92 companies studied into the below chart.
Now, you have a better understanding of what it takes to plan and budget for your own SaaS business, along every step of the revenue curve. Especially, if you are venture capital backed, or plan to go head-to-head against other venture capital backed companies (and the deep pockets they will have in shooting bullets in your direction).
Growth: Buckle your seat belts, and get ready for a wild ride. These companies were averaging some pretty fast 40-50% growth rates, over time. It only took these 92 companies an average of 6 years to grow from under $5MM in revenues to over $100MM in revenues. And, while growth is exciting, it sure brings a lot of headaches when trying to scale your business and processes along the way. So, plan ahead.
Gross Margin: I was surprised the 60-70% gross margins were as low as they were here. You hear about how much venture capitalists like the SaaS space because of their high margins, but that is much harder to see in the above chart. So, if you were planning to strike it rich with 80-90% margins, think again, as it looks like prices are coming down.
Sales & Marketing Investment: In order to get to their first $1MM in revenues, they needed to invest $1.5MM in sales and marketing, on average. To get to their first $1MM in gross profit, they needed to invest $2.4MM in sales and marketing, on average. Hopefully, you have raised enough capital to put enough sales and marketing muscle behind your business, and fund these startup losses. The investment here is material in the 40-50% range, and maintains itself at very high levels over time, resulting in almost a two year payback period!! Don't forget to read this post on metrics specifically related to SaaS sales team metrics, for deeper-level benchmarks.
R&D and Capex: Don't think you build a product and you are done with it. These companies are plowing in tons of monies into improving their products over time. Think 25% of revenues long term, and that takes a lot of capital backing in the absence of material profits.
EBITDA: I understand that investing in long term growth requires a material investment, often resulting in near term losses. But, I was surprised how long the losses continue, over many years. These companies didn't really break even until they got to $75MM in revenues, on average. And, even then, the bottom line profits were not all that exciting, at 4% of sales. Yes, I know, the numbers will look a lot better at $200MM in revenues, than they do at $100MM in revenues, but that is a really a long time to have investors wait for a meaningful return on their investment.
Valuation: Think about this--a $100MM revenue SaaS business is worth $380MM at the 3.8x average multiplier cited in the report, which means it is trading at a whopping 95x cash flow. I'm sorry, I just don't see the logic in that. There are tons of other cash-generating businesses you can buy for a lot less money, and actually have a lot more to show for it. So, buyer beware!
Thanks again to the River Cities team to putting all that hard work into their research report. Now we all can benefit from it, in terms of modeling our own SaaS businesses.
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