It’s ok and even desirable to be unprofitable when you’re adding revenue at an acceptable cost and you’ve got 100%+ net dollar retention, meaning you never lose the customer and actually grow them over time. In order to measure the acceptable cost of new SaaS revenue, we look at new revenue vs operating loss, and its derivative metric which is ‘payback period’. If you’re paying back the cost of acquiring the customer within 1.5 years, so long as you never lost that customer (100%+ NDR), you’re doing very well.
To measure payback period, we looked at new revenue to net operating loss for the last 73 SaaS companies to IPO since October 2017, that were still not generating a profit at the time of IPO (55 out of 73). The data is below. The formula for payback period is 1/(new revenue/operating loss). The formula for cost of new revenue is the simpler new revenue/operating loss.
Median payback is 1 year. The 55 SaaS companies that were still not profitable at IPO had a payback period of 1 year. This is exceptional. If you’re paying for the customer in 1 year and never losing the customer (100%+ NDR), you’re building a very large and valuable business. The average was 1.3 years, which is still within the 1.5 year mark we look for.
Median cost of new revenue is $0.96. The cost of acquiring new revenue in the past year for these SaaS companies was $0.96 of operating loss for every $1 of new revenue. Again, an excellent figure. The average was a higher $1.59 of new revenue for every $1 of operating loss.
Operating loss definition. The definition of operating loss is fully loaded; it’s revenue — COGS — S&M — R&D — G&A (technical point: be sure to use the absolute value of operating loss). It’s not correct to just look at S&M cost or to exclude any other cost associated with running the business. The measurement period for operating loss and new revenue is 1 year, so as to eliminate any seasonality.
The lesson here is that if you’re never losing the customer and have a short payback period, operating losses are desirable, especially since SaaS businesses are valued on ARR. Focus on keeping your payback period under 1.5 years, your cost of new revenue under $1.00, and your net dollar retention at or above 100%.
Sammy is the Managing Partner and Co-Founder of Blossom Street Ventures. Visit us at blossomstreetventures.com and email directly at firstname.lastname@example.org. We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 100%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.