Sprout Social is a successful social media management SaaS company targeting SMBs. We read their S1 recently looking for insights into their business that we could learn from. A summary of the S1 is below.
The numbers are good. 23,693 customers. 99% of revenue is software. revenue of $44.8 million, $78.8 million, and $102.7 million during the years ended December 31, 2017, 2018 and 2019. $131 million in ARR as of June 30, 2020. 4.9 rating and 99% CEO approval rating on Glassdoor. Annual contract values have grown 187% over the past four years through December 31, 2019. 29% of revenue come from outside the US.
What SPT does. SPT “brings together social messaging, data and workflows in a unified system of record, intelligence and action. Operating across major social media networks, we provide organizations with a centralized platform to effectively manage their social media. Our platform is the top user-rated social media management software across all categories and customer segments according to G2. We have the highest-rated customer support of any platform in the industry according to G2 Our customers currently spend an average of more than four hours every day on our platform.”
For example…“Managing the complexity of social media and providing a positive customer experience require that all parts of an organization share a single system of record, intelligence and action. For example, a social media message from a customer may require collaborative input and action from multiple departments at once. Without a centralized platform to provide visibility, workflow and coordination across business functions, the customer experience can become disjointed and inconsistent.”
Net losses are increasing. “We generated net losses of $21.9 million, $20.9 million and $46.8 million during the years ended December 31, 2017, 2018 and 2019, respectively, and net losses of $15.9 million and $18.8 million for the six months ended June 30, 2019 and 2020”
Largely SMB customer base. The company ended 2019 with 23,693 customers of which only 2,185 contributed more than $10k of ARR.
But ACV is growing. “annual contract values have grown 187% over the past four years through December 31, 2019, and increased on average more than six times for customers who have adopted our new Listening product, which was introduced in October 2018 and represents over $10 million of total ARR as of December 31, 2019”
Pricing. “We price our services on a tiered subscription-based model that allows our customers to choose a core plan based on their needs and license the platform on a per user per month basis. Customers can then add users and modules for additional monthly rates depending on their individual needs.”
Social matters. “76% of consumers are more likely to buy from a brand that they are connected with on social media. Additionally, Lyfe Marketing states that consumers report spending 20% to 40% more on brands that have interacted with them on social media. Consumers demand that brands be present and responsive across social networks, with more than 80% anticipating a response to a social media message within 24 hours. Billions of conversations that were previously taking place via email or over the telephone are now occurring over social media. We believe social media provides the largest source of business intelligence that has ever existed.”
Easy trials are critical. “In 2019, the majority of our new customer revenue resulted from our trials and other inbound sources. Our trial allows prospective customers to set up and use our software within minutes and without assistance. The strength of our brand and content marketing resulted in the majority of our inbound trials generated through unpaid marketing. We have experienced strong organic new customer growth due to low-friction, self-serve onboarding that allows us to acquire customers with relatively low sales and marketing investment. Many new customers adopt our solution during their first engagement with us.” Free trials are initially 30 days.
This is a product first company. “We generated more than 80% of our revenue from new customers in 2019 from unpaid channels.”
SPT serves all segments. “We have proven success in the SMB, Mid-market and Enterprise segments, with balanced revenue and substantial growth in each.”
Customer base drives product experience. “With over 24,000 current customers and billions of data points, we are able to harness massive amounts of feedback to optimize our products rapidly and in real-time, benefiting our platform by enabling us to understand the key features and products that are important to our customers and create compelling user experiences.”
Voting power is concentrated. “Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. As of June 30, 2020, our outstanding Class B common stock represented approximately 70.8% of the voting power of our outstanding capital stock. as a result of our dual class stock, the holders of Class B common stock, our Co-Founders, collectively control all matters submitted to our stockholders for approval.”
Capital in. Prior to the offering, the company had no debt, $80mm of cash, and $280mm invested for a net investment $200mm. The business has $103mm of revenue for cash efficiency of $0.52. That is in line with the median for SaaS companies we follow (median is $0.58).
Growth was mostly organic. The company didn’t complete it’s first acquisition until 2017. “Excluding the impact of the 2017 acquisition of Simply Measured, Inc., or Simply Measured, our organic growth rate in 2018 and 2019 was 54% and 44%, respectively.” Simply Measured represented $16mm of the company’s $70mm of ARR in 2017. In 2019 however, Simply Measured represents $3mm of the company’s ARR. The purchase price was only $13mm; in all likelihood they were highly distressed since they sold for ~1x revenue.
Subscriptions are varied. “Our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable during the contractual subscription term.” Services are only 1% of revenue and 3rd party resellers don’t generate a material amount of revenue.
Pricing is simple. “Our tiered subscription-based model allows our customers to choose among three core plans to meet their needs. Each plan is licensed on a per user per month basis at prices dependent on the level of features offered. Additional product modules, which offer increased functionality depending on a customer’s needs, can be purchased by the customer on a per user per month basis.”
LTV to CAC is 6x. “We calculate the lifetime value of our customers and associated customer acquisition costs for a particular year by comparing (i) gross profit from net new organic ARR for the year divided by one minus the estimated subscription renewal rate to (ii) total sales and marketing expense incurred in the preceding year. On this basis, we estimate that for each of 2018 and 2019, the calculated lifetime value of our customers has exceeded six times the associated cost of acquiring them.”
Enterprise net dollar retention is strong. “Our dollar-based net retention rate for the years ended December 31, 2018 and 2019 was 106% and 110%, respectively. Our dollar-based net retention rate excluding our SMB customers for the years ended December 31, 2018 and 2019 was 115% and 120%, respectively.”
Free cash flow is much better than operating income. Operating loss was -$21mm and -$47mm in 2018 and 2019. Free cash flow burn was -$19mm and -$15mm in the same years.
91% of contracts are 1 year or less. “As of December 31, 2019, including amounts already invoiced and amounts contracted but not yet invoiced, $42.1 million of revenue was expected to be recognized from remaining performance obligations, of which 91% is expected to be recognized in the next 12 months, with the remainder expected to be recognized the following year.”
Single code base allows for responsiveness. “We operate a single code-base without the need for customizations or professional services, allowing us to efficiently scale our platform and quickly react to changes in the market. Relative to our primary competitors, our platform is the top user-rated social media management software across all categories and customer segments according to G2, reinforcing our leading market position and brand.”
SPT’s view of the market. “We estimate that, based on our current average customer spending levels, the annual potential market opportunity for our solution is currently $13 billion in the United States and, with approximately 29% of our revenue coming from customers outside of the United States in 2019, we believe the opportunity internationally is at least as large. We also believe there is a significant opportunity to expand the use of our platform across our customers’ organizations and increase our average customer spending levels. If we assume spending levels reach the average for the top 10% of our current customers in each segment, our annual potential market opportunity increases to an estimated $51 billion in the United States.”
Co-founder is CEO and he owns a big chunk of the business. “Mr. Howard co-founded Sprout Social and has served as our President and Chief Executive Officer and as a member of our board of directors since April 2010.” The CTO is also a cofounder. The CEO had a salary of $316k in 2019. The CEO owned 39% of the business before IPO and the CTO owned 41%. NEA is the company’s primary venture investor.
Hopefully these notes are helpful to you in thinking about your own SaaS business, especially if you target SMBs.