In an effort to generate as much revenue as possible, SaaS companies overlook the importance of cash efficiency. In our view, cash efficiency, measured as revenue per year / equity + debt invested, is every bit as important as growth. After all, if you’re spending too much to grow you’re simply diluting away your return.
We did an analysis looking at the revenue, equity, and debt of 73 publicly traded SaaS companies at the time they went public. Using the equation above (revenue/[equity invested + debt]), we were able to observe the cash efficiency of each company. The conclusion: if you can generate $0.58 cents of revenue each year per $1.00 of investment in SaaS, you’re on par with successful SaaS businesses that went public. Why does it make sense that $1 generates $0.58? Because good SaaS businesses have net retention of 100%+, so they generate that revenue every year. Below is the data.
A few companies stand out: Veeva Systems and Atlassian were built with very little investment, generating $14.34 of revenue per year for each dollar invested and $13.26 respectively. Those companies have very happy investors, and indeed they’re so prolific that if we pull them from the data set, the average falls from $1.08 to $0.67. The median of $0.58 is what we look to as the relevant metric, so that outliers have no impact.
Cash efficiency may not be as sexy as revenue growth, but if you can generate $0.58 of recurring annual revenue per $1.00 of investment, you’re on your way to joining the ranks of successful publicly traded SaaS companies.