Right now there is an extreme focus on profitability in SaaS, but perhaps we’re overdoing it. The real focus should be on cash efficient growth. Cash efficient SaaS companies that retain the customer scale really nicely and build a lot of value. The math below shows good SaaS gets more cash efficient over time (beware, this blog contains math).
The first metric we look at is historical cash efficiency. We measure cash efficiency as revenue / [equity + debt — cash] or simply put, revenue / historical net investment. The data below for the last 73 SaaS IPO’s shows at the time of IPO, SaaS companies generated on median $0.60 of revenue for every dollar of net investment up to the IPO. The average is higher at $0.92 of revenue for every dollar of investment. ARR is a close proxy to revenue, so comparing revenue to net investment works well as a proxy for historical cash efficiency. Furthermore, these are fine metrics so long as you have net dollar retention greater than 100%+ meaning you never lose that $0.60 of revenue and actually grow it over time.
In order to show that SaaS scales, we compare the revenue / net investment metric of $0.60 to another metric we really like, which is [current year revenue — last year’s revenue] / current year operating loss, or simply put new revenue / current operating loss. If SaaS companies get more efficient over time and truly scale, we would expect to see this figure which is a more current metric be higher than the historically looking revenue / net investment. Sure enough, it is. The new revenue / operating loss median is $0.96 and the average is $1.59. Those metrics are materially higher, meaning SaaS companies have been more efficient in generating recent revenue as opposed to revenue since day 1.
The math shows SaaS does scale as companies get bigger, so while profitability is great, so long as you’re growing cash efficiently (not necessarily profitably) and retain the customer (100%+ net dollar retention), you’ll build a fantastic business. Eventually, profitability comes with cash efficient scale and you’ll create a lot of value.
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.