Reflections on the SaaS Sector’s Benchmarks Coming into 2020

SaaS Sector’s Benchmarks  

Last week we published the most recent SaaS & Software benchmarks in our platform used by companies in their FP&A analyses for management, boards and investors. We’ve also added more filters by more granular break-outs of revenue, revenue growth rates and Average Contract Value, plus a filter for EBITDA, to help companies better compare themselves against the myriad SaaS business models that have evolved as SaaS has become more widespread.

In the 2020 Benchmarks, we added a number of new benchmarks around compensation expense, plus, a measure of the SaaS Cash Conversion Rate, popularized by Bessemer.  As the ratio of the ARR to the total capital invested into a company [ARR / (investment+debt-cash)], the Cash Conversion Score is effectively the return-on-investment of one dollar ever invested into a company.  Our goal here is to help companies gauge not only their resource allocations across the company as is traditional in benchmarking, but also the risk/reward of taking investment dollars ahead of sales.

Some interesting trends stand-out when we compare this year’s benchmark numbers against the benchmarks collected from SaaS companies 5 years ago.   It is clear that increasing investment into the sector over the past 5 years has led to earlier stage companies spending at a greater rate.  This puts them at greater risk in the current economic crisis.  At the same time, larger private SaaS vendors, approaching $100M, came into 2020 in better financial shape than on average 5 years ago, with better profitability, fewer employees on average and higher employee productivity.

Here’s a few of the broad trends that we see going into 2020:

Total Invested Capital in Private SaaS Companies

  • For growth companies, with revenues between $10M-$25M, total invested capital in companies increased a median of 60% between 2015 and 2020;
  • For larger, private SaaS companies with revenues between $50M-$100M, total invested capital increased a median of 18% during the same period.

EBITDA

  • For growth companies, with revenues between $10M-$25M, EBITDA worsened by a median of 3X between 2015 and 2020;
  • By contrast, larger, private SaaS companies with revenues between $50M-$100M improved EBITDA a median of almost 5X during the same period.

Cost of Revenue

  • Median Cost of Revenue as a % of Revenue stayed about the same for private SaaS companies under $50M stayed about same, while median cost of revenue for private SaaS between $50M-$100M fell by almost 27% over the past 5 years. This is most likely due to improved technologies and competition in public cloud hosting and more efficiencies in delivering products and services to customers.

Operating Expenses

  • Median R&D, Sales, Marketing, G&A was higher for SaaS companies with revenues between $10M-$25M in the 2020 benchmarks compared to 5 years ago, while those expense ratios for larger private companies were roughly the same this year as five years ago.

Retention Rates 

Reflecting increased attention to retention and expansion sales to the existing customer base, median Net Dollar Retention Rates have increased among private SaaS companies, with the greatest increase for the larger private SaaS companies.

  • Among companies with revenues between $50M-$100M, median Net Dollar Retention Rates increased by 15+% between 2015 and 2020.

Employee Productivity

Private SaaS employee productivity has been increasing gradually over the past 5 years for all revenue sizes from $10M-$100M.  The greatest increase has been among the larger private SaaS companies where median revenue per employee has increased by 18.4% over the past 5 years.

2020 Operations

Overall, it is clear that smaller SaaS companies are at more risk in the current environment than larger ones.  While median net cash from operations dramatically decreased by more than 5X for companies with revenues between $10M – $25M, at the other end of the spectrum, median net cash from operations dramatically improved by almost 5X over the past 5 years for the SaaS companies approaching $100M.  You could say that the risk was worth it especially for the kinds of 10X returns that the larger, private SaaS companies have been getting recently on exit, but with a sudden economic crisis, it has left the smaller companies less resilient in a world of tighter cash.

The SaaS sector continues to evolve and new business models are morphing all the time, affecting the operating benchmarks at every stage of growth.  In addition, benchmarks for time to profitability, not just for the best in class, but for the sector as a whole have shortened.  This means there is less time to make mistakes, fine-tune product/market fits and go-to-market strategies.

We deeply respect the operators and managers of the SaaS companies that benchmark with us who are using the data to make difficult operating decisions in these changing conditions.  We thank all the companies, large and small, that participated in the current benchmarking.

We expect to see smaller companies becoming more careful in spending, while we see larger SaaS companies maintaining and monitoring operations to manage through the current crisis.  Overall, the sector is resilient.   In addition, we see SaaS and major platform players dynamically evolving to manage and even take advantage of new business strategies over the next year to two years.  The SaaS sector, if anything is adaptable.

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