5 Major Takeaways From the 2020 Expansion SaaS Benchmarks Report
Four years ago, OpenView released the first annual Expansion SaaS Benchmarks Report in order to fill a critical data gap for SaaS founders and CFOs who had a lot of questions about optimal growth rates, burn levels, gross margins and other key data points.
While there was a wealth of relevant data available on publicly traded companies, there was almost nothing out there for expansion-stage companies. Worse than the lack of data was the existence of misguided rules of thumb that were putting companies on the wrong path.
OpenView’s goal for the Expansion SaaS Benchmarks Report is to recalibrate the conversation around what success actually looks like and what it really means to be a top performing software company. We wanted to give companies insight into what works on a broad scale to achieve steady and efficient success rather than focusing only on what works for the statistical outliers that tend to grab the spotlight.
Working with our sponsor, NetSuite, and a team of 20 early-stage venture firms, we secured the participation of more than 400 B2B software companies in this year’s survey. Approximately 70% of these companies sell to mid-market and enterprise customers, and 80% of individual respondents were CEOs, CFOs and VPs of Operations. The final report aggregates data across more than 1,200 respondents from the past few years, giving us a fairly longitudinal look at the performance of private software companies.
This year’s report provided some particularly interesting insights—especially in the context of COVID-19. The authors of the report, Kyle Poyar and Sean Fanning, recently stopped by the OV BUILD podcast to go over some of the biggest takeaways. Listen to the episode below, or scroll down to read the rest of this story.
1. Enterprise software is recession-proof
In late 2018, Sean Fanning wrote a piece for Crunchbase titled Are Enterprise Software Stocks Recession-Proof? With this year’s SaaS Benchmarks Report, we can now validate that hypothesis. Though we launched the survey in June—with the profound uncertainty of COVID hanging over our heads—we can now look at the data from both public and private software companies and say with confidence that enterprise software is indeed recession-proof.
Though we’re now officially in a recession, public revenue multiples are up 50% from their pre-COVID highs. Also, the actual stock prices of public SaaS companies are up more than 100% since the beginning of the year. There’s no question that investors love software, and the companies themselves have never been more valuable.
What’s behind this incredible resilience despite all the curve balls 2020 has hurled our way? First, there’s the digital transformation mega-trend. In April, Microsoft’s quarterly earnings article ran with the headline 2 Years of Digital Transformation in 2 Months. And they weren’t the only ones experiencing these leaps and bounds.
Second, another thesis of ours—that high switching costs make it difficult to rip and replace core platforms—also seems to be playing a role in software companies’ continued stability and success.
Even though some of our survey respondents reported cutting back on discretionary spend (sales and marketing budgets dropped from 40% of revenue in 2018 to 30% in 2020), net dollar retention is up because companies don’t need to spend as much to acquire new customers and CAC payback is down. With acquisition and retention running so efficiently, and a persistent demand, growth remains quite strong.
2. Product led growth takes an irrefutable lead over traditional go-to-market strategies
Because we take a special interest in product led growth (PLG) here at OpenView, we continue to track a public PLG index, which trades for around a 50% premium to the broader SaaS index. We’re also able to segment our private data to get a clear picture of how PLG companies compare to those with a more traditional go-to-market strategy. The verdict: PLG companies have had overwhelming success.
Related read: Everything you should know about product led growth
Even though only about a quarter of our survey respondents are PLG companies, that segment represents about half of the companies going public each year. The first factor in PLG success in 2020 is obvious. The shift to remote work has accelerated the pace of digital adoption and empowered individual users to be more proactive about determining exactly which tools they need to be most productive working from home. Both of these trends help to shorten the sales cycle while elevating the importance of a short time to value, a hallmark of PLG.
PLG companies make it easier for customers to reach them. They are always open, and they are designed to engage on prospects’ terms—meeting them where they live without forcing them to jump through hoops like scheduling demos. This flexibility and accessibility allows PLG companies to grow faster and with greater efficiency, especially at scale.
The second factor contributing to a PLG advantage is the fact that buyers have been hesitant to make big, expensive commitments. This reality gives PLG companies the upper hand because organizations are able to get started with PLG products for free or for a very low cost. PLG companies are also particularly suited to a land-and-expand model that uses bottom-up adoption to get a foothold in an organization without any major up front investment or risk.
Despite these clear advantages, we’re still underwhelmed by private companies’ adoption of PLG strategies. Although PLG companies are growing faster than and traded at a premium compared to their non-PLG peers, relatively few companies are willing to go all-in based on our criteria.
Part of the issue might be the misconceptions about what goes into creating a PLG company. For instance, many people seem to believe that having a free trial (or freemium pricing) qualifies an organization as PLG. Those people couldn’t be more wrong.
Others assume that PLG only works if you’re selling to the prosumer or SMB market. Also wrong. PLG definitely scales into both mid-market and enterprise. While PLG is the norm among companies targeting very small businesses, it’s also the growth strategy of choice for 34% of companies selling into the mid-market and 27% of organizations selling to enterprise.
True PLG is a cohesive strategy that starts with solving end-user pain and permeates every element of your product and organization. It means building with the ease of the end user always in mind. You lead with value, make it easy to get started, and make it easy to scale within an organization.
Self-service is key to getting the ball rolling, and from there it only makes sense that solving end-user pain will naturally ladder up to team pain and then organization-wide pain. More than half of Zoom customers who spend $100,000 or more annually started out with a single, free host. The potential for PLG growth really is almost limitless.
3. SaaS companies are ready to leap back into hyper-growth
Based on what we saw in the survey, it’s clear that companies are shifting back into hyper-growth mode.
Overall, the impact of COVID was not as significant as we had anticipated earlier in the year, especially for companies that were not overly exposed to the hospitality sector. On average, SaaS companies saw only a 10–25% impact on their budget; and median year-over-year growth only dropped by 10 points from 50% to 40%.
Related read: Our Advice For Getting Back to Hyper-Growth
Despite these positive numbers, companies did get more disciplined about their spending. Perhaps in response to the uncertainty of a COVID world, many organizations buckled down on controlling their discretionary spend, making sure they had plenty of cash runway, and shoring up relationships with existing customers.
As a result of these conservative spending strategies, SaaS companies are in a really interesting position. With this strong financial foundation, they’re now ready to ramp their investments in sales and marketing back up and drive growth at the rate to which they’ve become accustomed.
The trick to reaping prolonged benefits from this situation is to focus on wise and conscious growth rather than the old strategy of growth at all costs. We see three strategies that can help SaaS organizations put their feet firmly on the path toward more balanced and sustainable growth:
1. Build a process-driven go-to-market team
One of the most common causes of stalled growth is a trial-and-error go-to-market motion. Success depends on replicable strategies that deliver consistent results and scalability.
We recommend installing process discipline early on (even at Series A or Series B) when your team is still relatively small. Make a process-driven approach part of your company DNA by defining the go-to-market KPIs that will measure the effectiveness of your go-to-market team.
You’ll also want to look at leading indicators of future performance (time to quota, time to first deal, average quota attainment, percentage of reps who hit at least 70% of quota, etc.). Be purposeful and have a plan that helps you be as efficient and effective as possible.
2. Continue to go after expansion revenue
Of the companies that filed an S1 to go public in 2020, average net dollar retention was 126%. In the past, we’ve set 100% as the goal, but it’s clear that high-performing SaaS companies have cracked the code on successfully expanding their customers.
We see an opportunity to bring process discipline to the way companies engage with their customers in order to drive consistent and predictable expansion and up-sell. One of the most efficient and effective growth levers to influence this is pricing and packaging initiatives. Many companies paused such initiatives as a way to avoid upsetting existing customers during a pandemic, but it’s time to bring these tactics back into play.
3. Operate product and engineering as revenue-generating resources
Most companies spend about 30% of their revenue on product and engineering, and yet 50% of the founders in our survey couldn’t say how that money is spent.
Holding product and engineering teams to the same standard of accountability as sales and marketing will be a core pillar of driving sustainable hyper-growth in 2021 and beyond.
There are three areas companies should explore when starting to make this transition: Tactics, metrics and performance-based pay.
Tactics: Just like we hold sales and marketing teams to specific metrics, you want to set things like product KPIs with real business impact. This might be product influence revenue, word of mouth, referral acquisition revenue, feature-driven revenue, team velocity or product quality indicators. Basically, you just want ways to get a more accurate sense of the engineering team’s output.
Metrics: We talk about several different key metrics in the full report, but one of our favorites is burn productivity. Sometimes referred to by its more technical name of return on incremental invested capital, this metric looks at the ratio of gross profit added to the total amount of sales/marketing and product/engineering expense. It helps you identify the gross profit you’re getting back for a single dollar of sales/marketing and product/engineering expense.
When we look at this metric for public software, it’s tightly correlated with valuation and growth rate. And we see this correlation in our SaaS benchmarks data as well: Companies with better burn productivity grow faster when they acknowledge that product also owns revenue and rally the organization around that fact.
Performance-based pay: Finally, reward product and engineering team members when they drive real impact in the product funnel. Just like sales reps who make hundreds of thousands of dollars in commission, product managers should reap the benefits of launching features that drive significant inbound traffic that converts into revenue.
4. VCs need to step up and deliver
It’s a seller’s (founder’s) market for fundraising. There was a brief pause in fundraising due to the pandemic, but now—with strong performance—everyone is ready to step on the gas and accelerate growth into 2021.
On the downside, only two out of five founders would recommend their VC. That’s an NPS below the airline industry, which is saying something. And what it’s saying is that VCs need to step up and prove their value as partners.
Many VCs claim to be different. They promise to invest not only money, but also time, effort and resources as value-add partners. The problem is that it’s easy to make those kinds of promises; it’s harder to deliver on them. Many VCs fall woefully short of true partnership, instead focusing mainly on board representation and making occasional introductions.
To improve their credibility, VCs need to roll up their sleeves and help turn each dollar of equity capital into two dollars. Founders will expect this kind of commitment more than they have in the past.
5. The industry falls short on diversity, equity and inclusion
While there has been some progress toward building more diverse teams and boards, overall that progress is underwhelming.
One bright spot was an almost 50% improvement over 2017 in the number of respondents with one or more female board members. Admittedly, this jump may have been influenced by certain governmental actions such as California legislation to increase diversity on corporate boards.
Outside of this specific, small win, SaaS organizations are still deeply lacking when it comes to gender parity. Only 14% of companies have gender parity in leadership, and only 6% have gender parity across their workforce.
Things are similarly disheartening on other fronts. While we’re encouraged by the cultural momentum around ending systemic racism and committing to racial and ethnic diversity, equity and inclusion, it remains to be seen whether the broader wave of activism will translate into meaningful representation in leadership positions in software companies.
In this year’s survey, 45% of respondents indicated having one underrepresented minority in leadership, but only 27% could claim to have more than one underrepresented minority board of directors member.
The future looks bright
The bottom line: Expansion-stage SaaS companies are well positioned to thrive in 2021. The pandemic has not set them back much, and—in some cases—has driven unexpected (and sometimes exponential) growth.
Still, there’s work to do. More companies would do well to adopt true PLG strategies so they can keep pace with peers who are already all-in and outperforming the competition.
SaaS companies need to embrace a more process-driven approach, capitalize on expansion revenue and operate product and engineering teams as revenue-generating resources. And VCs need to do more to provide value.
All of us need to do a better job when it comes to equal representation. We’re far from reaching our goals, and we must continue reporting on these metrics to make sure that we have the data we need to continue pushing for more diversity, equity and inclusion across the industry.
That said, 2020 has been a hell of a year. We’ve all weathered a lot of uncertainty and change. Hopefully, we’ve learned a lot, too. The good news is that 2021 looks like a year full of potential and opportunity for SaaS organizations who are willing and able to pursue it.
Get the report
The 53-page 2020 Expansion SaaS Benchmarks Report includes tons of more info, including data on:
🙂 Founder attitudes
📈 The adoption of product led growth
👩🏾 Progress on executive diversity
☕️ How founders really feel about their VCs
View the interactive page and download the report here. Once you’ve done that, we’d love for you to join the conversation on LinkedIn.
Hint: You have to look beyond the website or pricing page.
Gross margin documents the business your product is building, yet it’s often tucked away in a financial update while a medley of product metrics enjoy the spotlight.
Using data from this year’s Expansion SaaS Benchmarks Report, OpenView’s Dan Knight breaks down the three distinct components to fundraising.