For questions, comments or to participate in next year’s survey, please email Sean Fanning at firstname.lastname@example.org.
Our inboxes are flooded almost daily with news of eye-popping funding rounds (more unicorns were minted in the second quarter of 2021 than in all of 2020), and many have a striped animal in common.
In this easy money environment, one would think becoming a unicorn is a foregone conclusion the moment your Delaware LLC is incorporated. But we don’t believe building software businesses can be reduced to a few rows in Excel with a roll forward of Annual Recurring Revenue. How many analysts expected Atlassian would still be growing 30% with 30% cash flow margins? Conversely, how many looked at the market opportunity in front of Alteryx and predicted they’d only grow 14% in Q2 2021?
Behind the scenes founders know there is a bifurcation into haves and have nots. There are more companies raising, hiring, and fighting to address the same customer needs in a market. And with higher valuations, expectations are also higher than ever. It never gets easier; things just move faster.
So, for those founders who still can’t sleep (we asked, again), objective data is critical to making the right strategic decisions that can propel long-term growth. In that spirit, we’re releasing the results of our fifth annual SaaS Financial & Operating Benchmarks Survey (formerly our Expansion SaaS Benchmarks survey). This report was designed specifically to enable operators to compare themselves against their direct peers across the metrics that matter most in a SaaS business.
This year’s survey included almost 600 participants from around the globe. It revealed surprising insights about the distribution and flows of capital within the public B2B SaaS landscape, what investors are rewarding in company performance, the prevalence of product-led growth, and how to position for success in a fundraise. We’ve also covered many of our usual favorite topics ranging from the key SaaS value drivers, pricing models, progress on executive diversity and much more.
Distribution of Respondents
The Haves and Have Nots of B2B
The flow of capital in SaaS is not equally distributed. There are haves and have nots of B2B software.
Nowhere is this more apparent than in the public index we track. In 2015 the median enterprise value (EV) / revenue multiple for a public SaaS company was 6.0x. As of December 2020, this multiple more than tripled to 18.4x. If we segment the universe further—by growth rate—disparity becomes obvious.
EV/Revenue Over Time Growth
Those growing >50% saw their EV multiples increase by 649% since 2015 as of August 2021
Those growing 30-50% saw their EV multiples increase by 152% since 2015 as of August 2021
But those growing 10-30% only saw an EV multiple increase by 102% since 2015 as of August 2021
To the victors go the spoils, and the fastest growing companies continue to reap the rewards for their extended expected growth trajectories, large market opportunities, and compelling cost structures.
Revenue Growth Rate Vs. Multiple
FCF Margin % vs. Multiple
What we’re also seeing is investors have forgotten all about the Rule of 40. It’s now all about the Rule of 30: 30% topline growth. This shift in thinking is informed by the truly massive (and growing) TAMs in SaaS – which are turning out to be far larger than folks previously thought. For high-growth companies, which are valued on the basis of potential, that raises the ceiling on overall valuations. This becomes a balancing act, though. For investors to generate returns, the growth trajectory has to be certain. Companies need to capture meaningful market share for investors to rationalize any returns in 10 years. For this same reason we see companies’ stocks crushed after reporting a beat of their earnings guidance—they don’t beat by enough!
A prime example of TAM expansion is Salesforce—who’s S-1 claimed a $7.1B market. Today the business is $22B in revenue (and claims to have a 19.8% market share of CRM applications, meaning they still have significant room to capture additional market share for their core product market segments). Plus, Salesforce has identified new customer needs to innovate and acquire solutions in order to address. Just think about how large the markets for Mulesoft, Slack, and Tableau are, which continues to drive TAM expansion!
Valuation Multiple Today vs. IPO
Valuation at IPO
Valuation as of August 2021
Large public product-led growth companies like Atlassian and Shopify have also shown that going public can be the beginning of the growth story — not the end. Many initiating coverage reports expected Atlassian would be growing 30% in 2018 — a year in which it actually grew nearly 40%. Similarly, reports on Shopify pegged growth rates through 2020 at 35%+, while it actually grew at a CAGR of 63% from 2017—20.
Annual Revenue Growth Rates at Scale
The key driver behind these mismatches of value is the constant expansion of what’s possible: bigger markets, stronger value propositions, new products, more profitable economic models, wider “moats” (competitive advantages), and the best in class management teams command premium valuations.
Three Steps to Becoming a “Have”
There is a phrase investors use: “priced in”. It refers to points when a company’s valuation reflects all of the certainty about what is going to come true for a given company. So and so isn’t really worth $1T today, but we’re paying ahead because it will be based on what we know to be true about the company.
Looking at the Wisdom Tree Cloud Computing Index, software multiples experienced compression in the first half of 2021. The SaaS Index we track was up 107% in 2020 but between the beginning of January and end of June this year, it was only up 5.2%. Companies keep growing their revenues, but prices aren’t budging upwards. As of mid-September the index has recovered slightly and is now up 10% this year.
% Change vs. Trading Date
As of 6 months ago, all earnings results this year were starting to look priced in with the exception of a select few companies now up more than 50% this year—including Asana, Sprout Social, Bill.com, LightspeedPOS, Hubspot, Cloudflare, Atlassian, Dynatrace, Datadog, and Workiva. These public market software “Haves” share a few traits that save them from the dreaded multiple compression:
Continued execution against large and growing market opportunities
Business models that enable rapid growth (i.e. product-led growth)
Unit economics that support high Free Cash Flow margins over the long term
Becoming a have starts with identifying potential of a large market and articulating the roadmap of how you will capture it. The world is unpredictable, and so is your future. Your primary driver of strategy must be answering (for yourself and for investors) the question of “how can we make decisions when we have no idea what they’ll lead to.” By feigning certainty where there is none, you’ve given investors significant permission to believe in the vision for the business. You have to start small but always have a large target market in mind. If you have a $1 market today, show how you will win it, then show investors that you are in fact winning that market, then tell the story about the next $1 market you will win. Monopolize a specific segment with homogenous needs, and from there, conquer the world.
One day, your business will be valued on cash flow. Cash flow results after costs and expenses are subtracted from revenues. When the potential revenue is larger (a larger market) the implied market share to capture enough revenue scale, to be valuable. Beyond just market risk, as an entrepreneur you must constantly reduce the quantum of perceived risk in pricing, competition, and cost structure. Sell investors on what you’ve done, what you’ll do next—and then exceed expectations to raise more. By telling a compelling narrative and constantly upgrading it, you’ve cracked the code to becoming a have.
Your Highest Potential Growth Engine is Still PLG
We created the PLG index in 2018 to track the public product-led growth companies. At the time, there were 17 companies on that list. Today the list includes 30 companies that we deem to be pure play PLG companies. What is more, nearly every company to go public in 2021 is now mentioning product-led growth in their S-1 filings (even unlikely ones such as Toast). Investors continue to bet that the more efficient cost structure and bottoms up approach to large markets will create category winners with larger cash flows one day. Public CEOs have noticed.
In the old days of SaaS, revenue growth was formulaic: capturing more revenue dollars meant budgeting more for your CRO to go out and hire more reps and flood the market with outbound sales & marketing initiatives. That’s no longer the only option. Today product-led companies flip the balance and treat their products as a primary driver of how they attract, convert, and expand their users.
One way we see this is that product-led companies have a higher ratio of product and engineering spend to sales and marketing, and this holds across both the public universe of companies we track, as well as our private data. These companies treat a large portion of product as a cost of acquisition. If you’re trying to grow just through sales & marketing, you will grow, but you will miss out on the other half of potential growth opportunities. The best performing companies are driving outsized spend on R&D to drive best return on ROIIC and this is part and parcel with PLG. In fact, PLG companies generate 1.7x more gross profit for every dollar of sales and product spent. Get your product team to pay for itself! What is more, companies with greater ROIIC are more valuable than those with low ROIIC.
ROIIC vs. EV/Revenue
Looking to Grow Faster This Year? Turn to Pricing.
In the near term, your best bet at accelerating growth doesn’t require increasing your spend on either R&D or sales & marketing. Instead, look to better monetize the value you’ve already delivered by optimizing your pricing and packaging strategy.
This year we’ve seen an explosion of interest in usage-based pricing models, which adapt to changes in buying behavior and better align price with customer value. Survey data shows that 45% of SaaS companies now have some form of usage-based pricing, up from 34% in 2020. Dozens of SaaS companies have implemented usage-based pricing in the past year from fast-growing startups like Cypress and Kong to large public companies like New Relic and Autodesk.
Usage-based companies are outgrowing their peers because they’re better at landing new customers and then organically expanding customers over time as usage grows. For more insights on how to scale to $100M+ ARR with a usage-based pricing model, check out our Usage-Based Pricing Playbook.
Top Quartile Metrics: Hygiene or Hype?
Now no narrative spun by a B2B “have” would be complete without them sharing metrics, because talk alone is still (sometimes) cheap. As we’ve shown, >30% growth is all that matters. And If we had a penny for every founder that told us “I didn’t care about metrics until VCs started asking” we’d have a lot of pennies worth less (ugh, inflation) than last year. Many founders don’t care about “financial” metrics. Engagement, usage, and other product and company specific metrics are more impactful.
So we’ve made it easy. We track six value drivers for software companies. Depending on your specific context, below is what it takes to be “best in class” on all of investors favorite metrics by each fundraising stage.
Series D or Later
Size and Growth
Annual Recurring Revenue (ARR)
Sales & Marketing Spend
SaaS Value Drivers
CAC Payback (months)
Gross Dollar Retention
Net Dollar Retention
Women in Leadership
BIPOC in Leadership
And so while growth is all that matters, this is in part because top quartile metrics are not just hype. A profitable economic model with a reasonable CAC and >100% net dollar retention (NDR) is now a baseline of what is required to command the best valuations. Of the companies that went public in 2020 and 2021YTD, nearly all have >100% NDR. Many of them also tout impressive sales & marketing efficiency metrics (like Monday.com’s claim of a 2:1 ratio of ARR added vs. dollar of cash burned over its entire lifetime)!
Best-in-class value drivers are the current expectation for all companies. While it might not seem like it right now, everything is valued on cash flows, eventually. Whatever metric or set of metrics you prioritize: LTV, CAC, Payback, Retention, Growth—all of these give hints at what long term cash flow margins might be for your business in aggregate or on a customer basis. The more predictable and larger those future cash, the better.
The Power is With the P’s: People and PLG
Take a look around. How many of your employees have been with your business for <18 months? How many who were with you for years prior to March 2020 have since left? The Great Resignation is real!
Millions of Americans are leaving their jobs driven by the trends of the last 18 months (remote work, to name just one). An Edelman survey suggests 1 in 5 employees have left jobs in the last 6 months. Also real is the Tech Talent War. With the acceleration of tech adoption and record amounts of funding there are more companies and more dollars competing for a limited pool of tech talent.
For the past few years, we’ve asked founders: what keeps you up at night? Consistently, we see founders report that hiring top talent, product execution, and go to market execution are their top concerns. While last year go-to-market was the top concern, this year we’re not surprised to see the largest year-over-year change has been around hiring (both hiring the best and hiring fast enough).
What’s Keeping You Up At Night - YoY Change
While not surprising, it should be concerning. Do the math — most of the expenses in a software organization are people! Not filling open roles fast enough – or at all – is going to cause companies to fall behind on their plans to ship products, close new deals, and upsell customers. Solving for the lack of talent is perhaps THE most important place an executive team can spend their time right now.
In a market where tech talent is tight, companies can differentiate on culture, and specifically a diverse culture. Per The Washington Post, “76 percent of employees and job seekers said a diverse workforce was important when evaluating companies and job offers.” A study by Gallup confirmed that Gen Z and millennials now make up 46% of the full-time U.S. Some of these groups’ top priorities in a potential employer are ethical management and an organization that is diverse and inclusive of all people. What is more, 1 in 3 respondents to an Edelman survey claim they have left a job because their employer refused to take a stand on social and political issues and 60% want to find an employer that is a better fit with their personal values. Beyond culture, talking the talk and walking the walk on your values matters.
We’ve tracked diversity & inclusion in our reports for 5 years now, and this year we were disappointed to see only a small bump in parity at the leadership level and no increase in Board representation. We do expect this to continue to shift as companies with at least 1 female board member are outgrowing their peers, but the pace of change has continued to be slow. We have also started to track BIPOC representation and look forward to seeing those representation statistics climb over the coming years. While the trends are in the right direction, there’s obviously still a lot of room for improvement. With the power in employees’ hands, we’re encouraged about how these statistics may trend over the coming years.
1+ Female BoD
Gender Parity in Leadership
Gender Parity on BoD
BIPOC Company Leadership
BIPOC Parity on BoD
PLG can also be a cheat code to bypass the Tech Talent War. Sales-led organizations are easy to model – spend money on marketing to drive leads, have humans reach out to those leads and humans close deals. In the reps times quota equals bookings equation, sales heads are the rate limiter!
Instead of adding bodies, find ways to get more leverage out of your product. Break the dependency on expanding S&M headcount to drive top line growth. We’re continuing to see free offerings to grow top-of-funnel acquisition, bottom-up sales, and dedicated product growth teams as popular tactics.
PLG Technique Adoption
Free Trial Offering
Dedicated Growth Resources (FTEs)
Self-Service Buying Experience
Product analytics for Decision Making
Product Qualified Leads (PQLs)
PLG-ifying your business is worth the investment. And there are plenty of examples to share. Logz.io, an OpenView portfolio company, launched their first self-service offering in late 2019 with only two engineers. 12 months later they found that self-service accounted for 50% of new customers and these customers grew their spend by an average of 300% over the course of their first year. On top of that, 10% of Logz.io’s self-service sign-ups became enterprise opportunities, helping to create a more efficient and qualified enterprise sales pipeline.
PLG is still your secret weapon: it might get mentioned in every public company S-1, but it has yet to see widespread adoption; invest more in product, get additional leverage, grow faster.
Best-in-class companies marry the trio of big market, compelling growth engine, and unit economics: telling a big story, nailing the execution, and capturing market share efficiently.
Culture is critical to hiring in 2021: execution bridges narrative and potential, but people are your most important asset and largest investment; your workforce demands culture and conviction.