For SaaS companies, how fast is fast enough?

September 24, 2015

We announced recently that average annual revenue growth for the fastest growth private SaaS companies had jumped from last year’s median of 100% to this year’s 150% annual revenue growth.  The press release got a lot of attention and was reported in InfoWorld, ZDNet, CPA Practice Advisor and the Kiplinger Letter, among others.  

How Fast is Fast Enough?

Accelerated revenue growth is strongest for well-funded SaaS companies.     Increasingly large venture flows have gone to private companies with compelling stories about quickly hitting $100M in revenues and becoming the next unicorns.    

Typically, the largest funding rounds are being done at the $20M-$40M revenue ranges to fund the major sprint from mid-sized private company to IPO or other lucrative exit.   The data is pretty clear that fast revenue growth is strongly correlated with high valuations and attracts investors in both the private and public markets.

But not all private software and SaaS companies are on the path to become the next unicorns; many are successfully growing in the 20-50% annual growth range.  So we compared revenue growth and operating expense for 3 sets of companies in this mid-range of revenue (between $20-$30M):  the top 25% private firms in terms of revenue growth, the top 25% private firms in terms of operating income (we defined as “most profitable”), and venture backed overall.   By comparing these different peer groups, we can see their benchmarks for revenue growth, as well as a number of other key operating benchmarks.  Both groups were about 8 years out from founding.

graph of 3 growth rates

When comparing the most profitable companies to the fastest growth companies, there is almost no growth, profit or operating expense benchmark that is similar.  Cost of revenue, R&D, Sales, Marketing, Customer Service, G&A, hosting, cash and all balance sheet items were significantly different.  Interestingly, only DSO among traditional financial benchmarks, is almost the same for both groups (median 76 days in a large range for both groups).

Sales Expense 3 X for Fast Growth Companies versus Profitable Companies

Sales expense for the fastest growth companies was 3 times the benchmark for the most profitable companies – and the fastest growth companies had an average of twice the headcount in Sales as the most profitable companies.  With a larger sales force for the same amount of revenue, sales cycles for the fast growth companies were half the sales cycle for the profitable companies.  At the same time, recognized revenue per individual sales contributor (feet on the street in more traditional parlance) for the profitable companies was benchmarked at 3 times more than that for the fastest growth companies.

For both the fastest growth companies and the most profitable companies, Sales expense per employee and average Sales compensation and benefits per employee benchmarks were about the same.    

High Growth Companies Feeding the Funnel Faster

While high growth companies had about the same number of employees in Marketing as the top quartile of profitable companies, high growth companies are spending almost 4 times as much in total Marketing expense as a percentage of the same average revenues.

No wonder that the high growth companies report almost 4 times as many Marketing Qualified Leads (MQLs) generated.  By feeding the Marketing funnel with more MQLs, these companies are achieving dramatically higher annual growth rates.

The End Justifies the Means

The fastest growth companies are betting on the big payoff that fast revenue growth will bring them and investing heavily ahead of revenues on Sales, Marketing, R&D and hosting infrastructure.  At the same time, plenty of successful companies are not in the unicorn herd and not spending hugely beyond revenues.   In talking to CFOs and finance teams across the country throughout the year about growth, we’ve heard many CFOs say they are in constant planning mode because whatever your growth goals, the spending, the revenue and the cash models – all the moving pieces of each – have to dynamically come together.

To see the actual benchmarks and differentiation among tightly defined peer groups (defined by revenue size, average contract size, and funding levels), contact us to see the 2015 benchmark results.  Participating in a benchmarking community of peers helps companies plan better, manage to targets better and iterate on their growth model better.  Contact us if you’d like to learn more.