SaaS businesses that have gone public are very cash efficient

SaaS businesses that have gone public have historically been very cash efficient, generating the equivalent of $12.58 in lifetime revenue for every $1.00 of equity invested.  The math drives home the point that cash efficiency is critical if you’re going to build a successful SaaS business.  So how did we calculate the $12.58 of lifetime revenue and how can you calculate the metric for your own SaaS business?

 

First, we needed to determine how much revenue is being generated annually per dollar of equity invested in the business. We looked at this metrics for 49 SaaS IPO’s since 1997 - specifically we looked at revenue in the year prior to going public and divided that by total equity invested.  The median is $0.80 of revenue in a year for every $1.00 of equity invested.  If you’re anywhere near $0.80, you’re on the right path.  The data is below:

 

        Efficiency
Year Company Revenue Capital REV/ $ Capital
1997 Ultimate Softare $17,592,000 --- ---
1999 LivePerson Inc. $286,000 $23,761,000 $0.01
2003 SalesForce $81,536,000 $91,866,000 $0.89
2005 Intralinks $146,007,000 $181,438,000 $0.80
2007 Netsuite $67,202,000 $143,807,000 $0.47
2007 Athenahealth, Inc. $86,914,000 $52,726,338 $1.65
2008 LogMeIN, Inc. $59,001,292 $35,814,017 $1.65
2008 Medidata Solutions $86,274,000 $34,814,000 $2.48
2009 SPS Commerce, Inc. $35,845,000 $71,111,000 $0.50
2009 BroadSoft, Inc.  $68,887,000 $93,589,000 $0.74
2009 RealPage, Inc. $140,902,000 $96,091,000 $1.47
2009 LinkedIn $200,736,000 $125,390,000 $1.60
2010 Cornerstone $43,731,000 $42,687,000 $1.02
2011 Proofpoint, Inc. $77,186,000 $127,645,000 $0.60
2011 Demandware $56,547,000 $87,648,000 $0.65
2011 Jive Software, Inc. $60,973,000 $57,565,000 $1.06
2011 ServiceNow $128,072,000 $77,987,000 $1.64
2011 WorkDay $199,128,000 $111,647,000 $1.78
2011 BazaarVoice $64,482,000 $35,159,000 $1.83
2011 Splunk $100,542,000 $50,455,000 $1.99
2012 Textura $21,681,000 $154,408,000 $0.14
2012 Marketo $58,413,000 $125,620,000 $0.46
2012 Benefitfocus, Inc. $81,739,000 $141,587,000 $0.58
2012 Marin Software $53,917,000 $89,141,000 $0.60
2012 Lifelock $193,949,000 $283,599,000 $0.68
2012 Qualys, Inc. $76,212,000 $77,680,000 $0.98
2012 Cvent, Inc.  $83,474,000 $42,495,000 $1.96
2013 HortonWorks $35,270,000 $107,017,000 $0.33
2013 2U $83,127,000 $105,872,000 $0.79
2013 Zendesk $72,045,000 $90,189,000 $0.80
2013 Five9, Inc.  $84,132,000 $87,828,000 $0.96
2013 RingCentral, Inc. $135,941,000 $86,654,000 $1.57
2013 Castlight Health $12,973,000 $6,886,000 $1.88
2013 MobileIron, Inc. $105,574,000 $19,007,000 $5.55
2013 Veeva Systems Inc. $167,953,000 $11,627,000 $14.45
2014 Nant Health $33,921,000 $642,305,000 $0.05
2014 Box Inc $124,192,000 $423,032,000 $0.29
2014 New Relic, Inc. $85,002,000 $215,254,000 $0.39
2014 Appfolio $47,671,000 $64,713,000 $0.74
2014 Hubspot $93,830,000 $118,606,000 $0.79
2015 Secureworks $262,130,000 $622,065,000 $0.42
2015 MindBody $76,620,000 $170,159,000 $0.45
2015 Instructure $56,678,000 $114,361,000 $0.50
2015 Xactly $61,111,000 $90,443,000 $0.68
2015 Match Group $888,268,000 $912,170,000 $0.97
2015 Shopify $105,018,000 $98,349,000 $1.07
2015 Acacia $211,521,000 $69,685,000 $3.04
2015 Atlassian $319,521,000 $18,461,000 $17.31
2016 Twilio $192,894,000 $266,225,000 $0.72
         
Median   $81,739,000 $91,154,500 $0.80

 

Why does it make sense to generate only $0.80 of revenue per $1.00 of equity invested? Because in a true SaaS business, the revenue recurs for a long time and for particularly strong businesses, indefinitely.  This “net revenue retention” is defined as revenue from existing customers at the beginning of the year + revenue expansion from those existing customers during the year – revenue lost from customers who left that year.  The figures below show the net revenue retention rate from one year to the next for publicly traded SaaS businesses is 103% on median (these were the only companies we found that make the data consistently available).  In other words, the customer base at these companies spent 3% more than they did in the prior year, even when accounting for lost revenue from churned accounts.  Once again, if your SaaS business has net revenue retention at or near 103%, again you’re on the right path. 

 

        2015 2014 2013
NET RETENTION Ticker Time Period TTM Revenue Retention Retention Retention
2U TWOU Annual $150 120% 112% 144%
Benefitfocus, Inc. BNFT Annual $185 95% 95% 95%
Box, Inc. BOX Annual $280 126% 136% 144%
Castlight Health, Inc.  CSLT Annual $75 116% 103% ---
Cornerstone OnDemand, Inc. CSOD Annual $340 95% 95% 95%
Cvent, Inc.  CVT Annual $188 102% 102% ---
Demandware, Inc. DWRE Annual $237 100% 100% 100%
Five9, Inc.  FIVN Annual $129 96% 96% 100%
HubSpot, Inc. HUBS Monthly $182 99% 93% 83%
Marketo, Inc. MKTO Annual $210 105% 109% 100%
New Relic, Inc. NEWR Monthly $162 130% 110% ---
Proofpoint, Inc. PFPT Annual $265 90% 90% 90%
RingCentral, Inc. RNG Monthly $296 99% 99% ---
SecureWorks SCWX Annual --- 105% 102% 99%
Veeva Systems Inc. VEEV Annual $382 136% 166% ---
Zendesk, Inc. ZEN Annual $209 123% --- ---
Instructure INST Annual $82 100% 100% 100%
Xactly XTLY Annual $76 104% 102% ---
             
Median     $188 103% 102% 100%

 

Now that we know net revenue retention is 103% and SaaS businesses generally generate $0.80 for every $1.00 of equity invested, with these figures we can derive the lifetime revenue from $1.00 of equity invested.  We take $0.80 in the first year and grow it by 3% per year into perpetuity.  We then discount each of these annual cash flows by 10% to account for the time value of money. The result is lifetime revenue of $12.58 for every $1.00 of equity invested.  The math can be seen at the following link in case this article wasn’t nerdy enough for you already.  You can put your own metrics in the highlighted cells to spit out your lifetime revenue.

 

In conclusion, a good cash efficient SaaS business with standard net revenue retention of 103% converts $1.00 of equity into the equivalent of $12.58 today.  So long as you can achieve $1.00 of revenue per $0.80 of equity invested and keep net retention of 103%, you’ll be well on your way to going public.  

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