2017 Expansion SaaS Benchmarks

Earlier this summer, we surveyed 300 enterprise software companies ranging from pre-revenue to more than $20 million in ARR and across every software category. The point of this survey was to gain a better understanding of how software companies are performing as a whole, and to help companies understand how they measure up against their peers – and not just a handful of well-known unicorns.

With our findings, we aim to reframe the conversation of how the tech ecosystem defines success in a growing software business. Success shouldn’t only be defined by an IPO in five years. Success means building a sustainable and enduring business that improves the lives of its employees, customers and shareholders alike.

Special Thanks to Our Partners

Who Took the Survey
A Look at Who We Surveyed
Reaching $100M
You have a 0.1% chance of reaching $100M in 5 years.

In the boardroom, you’ve probably been told that after you hit your first $1M in ARR, you should triple twice then double three times (known popularly as T2D3), ultimately reaching $100M ARR about 5 years later. But, of the ten most recent enterprise SaaS IPOs, only two – Nutanix and Cloudera (they collectively burned about $1.4 billion) – managed to actually grow at this breakneck speed. A handful of others were close behind, but half of them took eight or more years.

The companies shown above have been wildly successful, but most don’t meet the inflated growth expectations put on them by investors and outside market pressure – and these companies are the lucky few that have managed to IPO.

On the other hand, there are 5,000 venture-backed SaaS companies in North America that haven’t yet managed to IPO, but that make decisions about their business as if it’s realistic and even expected that they hit T2D3. Companies that fall into this trap often overhire and ultimately burnout trying to reach this near impossible benchmark.

To put it another way, only a handful out of the 5,000+ venture backed SaaS companies managed to hit $100M in 5 years and they required an enormous amount of capital to do so (read: up to $1B in some cases). Creating budgets around assumptions of performing like a statistical outlier seems a bit absurd to us.

KEY TAKEAWAY: Let’s reframe what it means to be a top performing SaaS company. You can build an enduring business by growing smart and sustainably – don’t feel boxed in by the T2D3 rule.

Growth at All Costs
Growth at all Costs Will Only Get You So Far

“The only essential thing is growth. Everything else we associate with startups follows from growth.”

Paul Graham, Y Combinator

It’s common for startups to grow rapidly early on. But after $5M in ARR, the median growth rate plummets, falling to 50%. It slows even further once companies reach $20M in ARR, down to less than 30% on average.

KEY TAKEAWAY: The real test for SaaS companies comes then in maintaining an accelerated growth rate as you hit scale, or in balancing growth and profitability.

Sales & Marketing Spend
Are you wasting your sales & marketing dollars?

Sales and Marketing spend is consistently the biggest line item on a startup’s income statement once a company hits $1M ARR – before that it’s R&D.

Sales and marketing spend peaks at 50% of ARR at the expansion stage. Too many companies underinvest in sales productivity, saddling them with huge costs without the ROI.

KEY TAKEAWAY: Start tracking time to quota of individual reps today and invest in training, technology and processes that will help you reduce ramp time for each new hire.

Leaky Bucket
Fix your ‘leaky bucket’ before pouring in more cash

Sales efficiency – the ‘magic number’ – shows the new revenue contribution from every dollar spent on sales and marketing.

On average, sales efficiency is about 0.7, so for every $1 spent on sales and marketing in a year a company gets $0.70 in revenue that same year. With a subscription business model, that $0.70 in revenue should grow and grow every year as customers renew.

These numbers prove why venture capital firms are willing to invest so much money in early stage companies that burn cash. As long as sales are efficient and retention rates are high, any extra dollar put into a startup will have a positive ROI over time.

KEY TAKEAWAY: You should be carefully monitoring your sales efficiency and looking for ways to improve or maintain it year-over-year. Look out for the ‘leaky bucket’ problem, where you spend significant sums to acquire new customers, but then they churn shortly thereafter (churn bait).

Burning Cash
You’re burning cash without realizing it

“Founder after founder is underestimating their CAC Payback. We talk to thousands of software companies every single year and the data consistently shows us an average CAC Payback of 18 months. Best-in-class is 6 to 12 months.”

– Adam Marcus, Managing Partner, OpenView

Survey data reveals the same pattern of miscalculating CAC – the median self-reported CAC Payback Period was 6 to 12 months. Based on the sales efficiency scores, which we derived from other inputs, we can tell that companies are not paying off their acquisition costs anywhere close to that quickly. Consistently underestimating CAC Payback leads to an overinvestment in sales and marketing spend and inefficient cash burn.

KEY TAKEAWAY: If you aren’t factoring in gross margins and fully loaded acquisition costs when calculating CAC Payback, you too are likely misrepresenting this important metric.

Common Mistakes When Calculating CAC Payback
  • Underestimating your true costs of acquisition. This should include all relevant costs, such as paid marketing spend, headcount, overhead, sales compensation, support during the trial, onboarding costs, etc.
  • Overinflating your recurring revenue. You need to strip out any one-time revenue, such as onboarding or services.
  • Leaving out gross margins and the ongoing costs of serving a customer, such as hosting, customer success and support.
The Key to Growth
The Key to Growth: Maximize Your Existing Customers Before Hunting for New Logos

While there is external pressure to acquire new logos and expand market share, the reality is that growth isn’t just about acquiring new customers. The fastest growing SaaS companies both retain and expand existing customers at a far higher rate than others.

Top SaaS companies see net negative churn, where the value of every new customer cohort actually increases over time. After all, it’s more efficient to up-sell to a customer you already have than going out and acquiring a new customer entirely.

KEY TAKEAWAY: You need to first make sure your product, pricing and sales incentives accommodate up-sell paths to allow for ongoing customer expansion.

A Note on Pricing
A Note on Pricing

Pricing is a SaaS company’s most efficient profit lever. Have you optimized your pricing? Learn how to price your product across every stage of growth, from seed stage to IPO, in our eBook Mastering SaaS Pricing.

Balancing Growth & Profitability
Balancing Growth and Profitability is Your Lifeline

Companies that perform best in public markets balance growth and profitability.

KeyBanc Capital Markets (formerly Pacific Crest Securities) data shows that 79% of the market cap of public SaaS was above the 40% threshold, and these companies trade at the highest multiples. But, most private companies still trend below the Rule of 40 and must improve to make attractive IPO candidates.

KEY TAKEAWAY: There are two levers at your disposal to build a fundable SaaS company – profitability and growth. Growth is the main focus for early stage companies, but a forward looking path to profitability is an insurance policy against future funding uncertainty.

It takes more than just smart people to grow a company

“A group’s collective intelligence is not predicted by the IQs of its individual members. But if a group includes more women, its collective intelligence rises.”

Carnegie Mellon / MIT Study

To be a successful company, you must hire the right team. This should include people with diverse experiences and backgrounds because without diversity of backgrounds, you also fail on diversity of ideas which in the long run will stymie growth and profitability.

Unfortunately, our data shows that too many software companies fail on the diversity front. 71% of all those surveyed have no female board members. Only 4% of those surveyed have parity between men and women on their boards. Similarly, only 12% have full parity between men and women within their leadership ranks (director level and above).

The Takeaway
The Takeaway

For far too long, the tech ecosystem has focused on growth at all costs and glorified so-called unicorns. These companies are often used as benchmarks for success, leading followers to grow unsustainably and irresponsibly. It’s time that software startups start benchmarking themselves against their peer group and setting realistic expectations for growth and spend. Doing so will help them more accurately plan for hiring and reduce burn while keeping an eye on profitability.

Seven lessons for scaling startups in 2017 and beyond:

  1. Growth at all costs only works for so long
  2. Figure out where you’re wasting your sales & marketing dollars
  3. Fix your ‘leaky bucket’ before pouring in more cash
  4. You’re probably burning cash without realizing it so figure out your true CAC
  5. Maximize your existing customers before hunting for new logos
  6. Profitability is your lifeline against future funding uncertainty
  7. Commit to creating a culture that’s attractive to diverse candidates

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