The lifetime value of $1 of SaaS investment should be $5 to $7

We recently wrote a blog about cash efficiency in SaaS that showed the typical SaaS company generates $0.64 of revenue per every $1.00 of investment at the time they go public.  At that level of annual revenue, the lifetime value of a SaaS customer is anywhere between $4.80 and $7.00 for each $1.00 of investment assuming your net retention is in 100% (in line with the median).  If you can achieve those two metrics: $0.64 of revenue per $1.00 of investment and 100% net retention of customers on a dollar basis, you’re on your way to going public.  Below is a discussion of the data.

 

First, you may be asking why it’s ok to generate less than $1 of revenue ($0.64) for each $1 invested? Because real SaaS revenue is recurring and as the data shows below, the typical SaaS business retains 100% of the prior year’s revenue when accounting for upgrades by existing customers, churn, and downgrades.  The specific formula is beginning of year revenue + upgrades from existing customers – churn – downgrades from existing customers, all in dollars of course, divided by beginning of year revenue.  Hence if you started the year with $100 of existing revenue from current customers, churned $2, had $3 of downgrades, and $5 of upgrades from existing customers, your net retention is 100%. 

 

    Net Retention  
Name Ticker at IPO Year
2U TWOU 144% 2013
Box, Inc. BOX 136% 2014
Castlight Health, Inc.  CSLT 116% 2015
Marin Software, Inc. MRIN 114% 2012
Lifelock LOCK 105% 2011
Xactly XTLY 104% 2015
Shopify SHOP 101% 2014
Five9, Inc.  FIVN 100% 2013
Instructure INST 100% 2015
RingCentral, Inc. RNG 99% 2012
Secureworks SCWX 97% 2015
Cornerstone OnDemand, Inc. CSOD 96% 2010
Benefitfocus, Inc. BNFT 95% 2013
Medidata Solutions, Inc. (CUSTOMER RETENTION) MDSO 92% 2007
Bazaarvoice, Inc. BV 89% 2011
HubSpot, Inc. HUBS 83% 2013
       
       
MEDIAN   100% 2013
AVERAGE   104%  

 

At 100% net retention, you’re effectively keeping the customer and their cash flow forever.  If you discount that perpetual cash flow by 10% to 15% doing a classic discounted cash flow analysis, the result is a lifetime value of the customer of $7 at a 10% discount rate and $4.80 at a 15% discount rate.  The discount rate chosen is of course arbitrary, but the analysis is the same. Strive for earning $0.64 of revenue for each dollar invested and 100% net dollar retention each year.  If you do that, as the table below shows, you’ll be in good company shortly. 

 

    S1       Revenue/
Name Ticker Year Revenue Debt Equity Capital
2U TWOU 2013 $83 $0 $106 $0.79
Athenahealth, Inc. ATHN 2006 $76 $27 $52 $0.95
Bazaarvoice, Inc. BV 2011 $64 $0 $35 $1.83
Benefitfocus, Inc. BNFT 2012 $82 $8 $142 $0.55
Box, Inc. BOX 2014 $124 $34 $424 $0.27
BroadSoft, Inc.  BSFT 2009 --- $18 $94 ---
Castlight Health, Inc.  CSLT 2013 $13 $0 $187 $0.07
Cornerstone OnDemand, Inc. CSOD 2010 $44 $10 $82 $0.47
Five9, Inc.  FIVN 2013 $84 $25 $88 $0.74
Hortonworks, Inc. HDP 2013 $11 $0 $107 $0.10
HubSpot, Inc. HUBS 2013 $78 $0 $114 $0.68
IntraLinks Holdings, Inc. IL 2010 $184 $126 $365 $0.38
Jive Software, Inc. JIVE 2010 $46 $9 $65 $0.63
Lifelock LOCK --- --- --- --- ---
LivePerson Inc. LPSN --- --- --- --- ---
LogMeIN, Inc. LOGM 2006 $11 $2 $21 $0.49
Marin Software, Inc. MRIN 2011 $36 $7 $54 $0.60
Medidata Solutions, Inc. MDSO 2008 $85 $23 $34 $1.48
MobileIron, Inc. MOBL 2013 $106 $4 $179 $0.57
New Relic, Inc. NEWR 2014 $63 $0 $113 $0.56
Proofpoint, Inc. PFPT 2010 $65 $0 $123 $0.53
Qualys, Inc. QLYS 2011 $76 $4 $77 $0.94
RealPage, Inc. RP 2009 $141 $52 $96 $0.95
RingCentral, Inc. RNG 2012 $115 $21 $84 $1.09
salesforce.com, Inc.  CRM 2003 $51 $6 $92 $0.52
ServiceNow, Inc. NOW 2011 $93 $0 $71 $1.31
Splunk, Inc. SPLK 2011 $66 $0 $46 $1.42
SPS Commerce, Inc. SPSC 2008 $31 $4 $71 $0.41
The Ultimate Software Group, Inc. ULTI 1997 --- --- --- ---
Veeva Systems Inc. VEEV 2013 $130 $0 $9 $14.34
Wix.com Ltd. WIX 2012 $44 $0 $49 $0.89
WorkDay, Inc. WDAY 2010 $134 $16 $277 $0.46
Zendesk, Inc. ZEN 2013 $72 $24 $90 $0.63
Secureworks SCWX 2015 $262 $0 $622 $0.42
Appfolio, Inc. APPF 2014 $48 $0 $65 $0.74
Atlassian Corporation TEAM 2015 $320 $0 $24 $13.26
Twilio TWLO 2015 $167 $0 $262 $0.64
Instructure INST 2014 $44 $0 $103 $0.43
Mindbody, Inc MB 2014 $70 $15 $166 $0.38
Shopify SHOP 2014 --- $0 $97 ---
Xactly XTLY 2015 $61 $27 $90 $0.52
Nutanix NTNX 2015 $241 $0 $357 $0.68
Apptio APTI 2015 $129 $0 $160 $0.81
Blackline BL 2015 $84 $28 $215 $0.34
Coupa Software COUP 2016 $84 $0 $182 $0.46
Okta OKTA 2016 $86 $0 $251 $0.34
Alarm.com ALRM 2014 $167 $7 $210 $0.77
Alteryx Inc AYX 2016 86 0 108 $0.79
Amber Road AMBR 2013 $53 $10 $92 $0.52
Appian Corporation APPN 2016 $133 $20 $57 $1.73
Blackbaud BLKB 2003 $118 $5 $42 $2.52
Callidus Software CALD 2002 $27 $5 $97 $0.26
Channel Advisors ECOM 2012 $54 $12 $94 $0.50
Cloudera CLDR 2017 $261 $0 $850 $0.31
Ebix EBIX --- --- --- --- ---
Ellie Mae ELLI 2009 $38 $1 $89 $0.42
Everbridge Inc EVBG 2015 $59 $17 $62 $0.74
FireEye FEYE 2012 $83 $12 $109 $0.69
HealthStream HSTM 1999 $4 $1 $21 $0.18
J2 Global JCOM 1998 $4 $7 $22 $0.12
Kinaxis KXSCF --- --- --- --- ---
Medidata Solutions MDSO 2008 $85 $23 $35 $1.48
Mimecast MIME --- --- --- --- ---
Mulesoft MULE 2016 $188 $0 $278 $0.67
NantHealth NH 2015 $58 $0 $641 $0.09
Paycom Software PAYC 2013 $108 $36 $64 $1.08
Paylocity Holding PCTY 2013 $77 $2 $37 $2.03
Q2 Holdings QTWO 2012 $41 $4 $30 $1.24
Tabula Rasa Healthcare TRHC 2015 $70 $40 $29 $1.02
Talend TLND 2015 $76 $10 $97 $0.71
The Trade Desk TTD 2016 --- $57 $83 ---
Upland Software UPLD 2013 $41 $29 $51 $0.52
Workiva WK 2013 $85 $18 $15 $2.63
Yext YEXT 2017 $124 $5 $173 $0.70
Zix ZIXI --- --- --- --- ---
             
             
Average   2012 $90 $12 $137 $1.16
Median   2013 $77 $5 $92 $0.64

 

 

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