2019 Benchmarks: Are You Burning Too Much Cash?
As you start planning for next year and beyond, the question of burn should be front and center for any founder. You need to have a grip on your monthly burn rate, cash out date, number of months of runway and whether your burn rate is appropriate given your revenue and growth rate. This is particularly urgent for 2020 given concerns of a slowing economy, trade wars, Brexit and general economic uncertainty.
To help out, we crunched the burn rate figures from OpenView’s 2019 Expansion SaaS Benchmarks study. This year’s survey included responses from more than 500 SaaS companies ranging from pre-revenue to $150M+ in ARR. The analysis focused on companies with at least $1M in ARR.
One quick caveat before getting into the data. Burn rates are a fairly crude check on financial efficiency. They don’t tell you the incremental return from spending more, whether on sales & marketing or research & development. Burn rates can – and should – vary based on what type of product you’re building and how much investment is required to achieve a defensible competitive advantage in the market. You should calibrate the optimal amount of burn in the context of your CAC payback, retention rates (especially net dollar retention), product vision and broader fundraising strategy.
Now onto the numbers. The first data cut we ran was to look at what percentage of companies were either break-even or profitable at varying levels of ARR and growth.
It’s clear that there’s a strong link between growth and profitability. 50% growth appears to be the bright red line that influences SaaS efficiency, perhaps influenced by the well publicized Rule of 40. Among companies growing faster than 50% year-over-year, only one-in-six (17%) reported being cash flow positive. That figure jumps to 43% among companies growing less than 50% year-over-year. Interestingly, those growing between 25-49% year-over-year had a similar likelihood of being cash flow positive as those growing <25%.
There is not a terribly strong link between company size and profitability, indicating that even smaller SaaS companies need to prioritize profitability if growth starts to stall. Reaching profitability allows any company to control their own destiny and to hedge against potential financing uncertainty. It opens up the exit landscape, too, allowing you to attract both financial and strategic buyers.
The second data cut we ran was to calculate the average (mean) burn rate based on these same parameters of ARR and growth.
In this view, both growth and ARR have a strong impact on burn (i.e. burn tends to increase from left to right and from top to bottom in the chart). There are a couple of notable exceptions, however. Look at the cell with $10-20M in ARR and <25% growth. The average burn for these companies was $492k per month, which is higher than for companies with more than $20M in ARR. The figures are even worse when you consider that 42% of companies in this group were cash flow positive, which means that the 58% who are burning cash are actually burning an average of $750k+ per month.
These businesses are in a very precarious position that we should all learn from. If (and when) growth does stall, make sure to swifty address it by recalibrating your spend accordingly. It’s important to get ahead of this: pay close attention to leading indicators of growth such as forecasted pipeline, number of new opportunities and lead volume. Freeze your hiring or institute a RIF as needed. Otherwise, you’ll risk running through your cash reserves and with dim prospects for additional financing.
Want to go deeper into these burn rate figures? Check out our new Data Explorer feature, which allows you to visualize your company’s peer benchmarks to see how you stack up.
Companyon Ventures enhanced our Expansion SaaS Benchmarks Data Explorer by building the accompanying SaaS Benchmarks Modeling Tool to measure the current and projected performance of their portfolio against other high-performing SaaS startups. Check out the tool here.
Our 2019 Expansion SaaS Benchmarks Data Explorer allows you to find your exact peer benchmarks around the metrics that matter most: YoY growth, gross margin, cash burn rate, CAC payback, net dollar retention and logo retention. Check it out!