How SaaS Vendors Will Adjust to the Investment Climate

January 28, 2016

Will risk averse investors in both the private (VC and PE) and public markets this year impact SaaS operating benchmarks like revenue growth, profitability, hiring and a host of other operating metrics in 2016? We’ve been getting calls from a number of saavy CFOs asking to see SaaS operating benchmarks from 2009 and 2010, just in case they need to revise targets and budgets as the year evolves. Many are expecting this year may bring some changes to the current business climate and preparing to be flexible. How will SaaS vendors adjust to the investment climate?

With Twitter, Box and a host of other unicorns wobbling, and overall stock market volatility — possibly towards a bear market (20+ drop from the peak) — business-to-business SaaS vendors, for the most part, appear to be doing what they ought to: growing revenue and subscribers as fast as possible. And that is paying off in terms of stock prices continuing to rise. Look at few successful SaaS companies compared to the NASDAQ 100:

While any SaaS model is first and foremost about signing up users and subscribers, the comparison between Twitter’s model, which requires a vast number of users for Twitter to monetize its business, the value of a B2B product is delivered to the first customer and builds with every additional customer. So, given that a large part of the stock market volatility is driven by externalities like the Chinese economy, a contentious US presidential election year, and dramatic changes in the oil and gas world, the fact that we are living in interesting times doesn’t mean SaaS vendors need to run for the hills. For the most part, if the change is mostly around the availability of investment dollars, operating metrics may look more like 2009 than anything new.

2016 will probably bring tighter cash management and an incremental shift towards better profit metrics (or at least a clear path to better metrics), plus a deeper scrutiny and fine tuning of key SaaS measurements like CAC, CLV/LTV and churn/renewal rates so that spending over revenues is less a leap of faith and more closely correlated with expected future results.

As we saw in 2009 and 2010, we expect that the companies will tighten up cash management as they did following the ’08 crash and ease up on the spending over revenues that has been creeping up since then.

Source: 2016 OPEXEngine Benchmarking Data All Rights Reserved

We expect that operating profits or lack thereof will also be of slightly higher focus than the last few years where valuations were almost totally driven by revenue growth. Average revenue growth for private SaaS companies continually increased (with a slight dip in 2012) over the past 6 -7 years for the sector overall, and we saw the highest median revenue growth among the top quartile of private growth companies — 150% median revenue growth on an average of $20M in FY 2014. Once final 2015 numbers are in, it will be interesting to see if the trend direction continued up or flattened by the end of the year.

Source: 2016 OPEXEngine Benchmarking Data All Rights Reserved

The global SaaS market is projected to grow from $49B in 2015 to $67B in 2018, attaining a CAGR of 8.14% over the next several years. alone is over $6B. One specific segment, the cloud analytics market, is expected to grow from $7.5B in 2015 to $23.1B in 2020, with a CAGR of 25.1%. Even if investment tightens up, it doesn’t look like the market opportunity is going away.

Bottom line, the past few years since the market turned around after 2008 have been hot markets for SaaS vendors to access growth capital and achieve (buy?) hyper growth rates of 100-150%. There’s been a direct correlation between revenue growth and valuations, and that will probably continue, but we expect to also see a greater focus on operating income and cash management, depending on how the year unfolds. Of course, the best SaaS vendors are always tightly managed and metrics-driven. We expect that companies will be paying increased attention to changes in the trends in the following areas:

  • Renewal rates – as growth and spending went up the past few years, so did churn. The best way to improve your cash picture is to improve renewals, bringing more money in the door so you need to spend less on new customer acquisition. Track the benchmarks for renewal rates by comparable companies in terms of revenue growth, funding/investment levels and business model — there are big differences when you break it out.
  • SaaS Sales productivity – watch benchmarks for sales quotas and quota attainment in OPEXEngine’s 2016 benchmarking.
  • Integration of Customer Success teams (and data tracking) with marketing, sales, product, and support teams to ensure a successful customer experience and one source of truth on customer information.
  • Extreme hiring – can you really grow your employee base by 100%+ in one year and be efficient? Employee hiring rates, on-boarding and productivity will be tracked closely after a couple of gogo years of competition for hiring tech workers.